UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-K

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended February 28, 2023 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

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
6.00% Notes due 2027   SAT   The New York Stock Exchange
8.00% Notes due 2027   SAJ   The New York Stock Exchange
8.125% Notes due 2027   SAY   The New York Stock Exchange
8.50% Notes due 2027   SAZ   The New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No

 

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 ☒ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of August 31, 2022 was approximately $211.1 million based upon a closing price of $24.28 reported for such date by the New York Stock Exchange.

 

The number of outstanding common shares of the registrant as of May 1, 2023 was 11,861,318.

 

 

 

 

 

NOTE ABOUT REFERENCES

 

In this Annual Report on Form 10-K (the “Annual Report”), the “Company,” “we,” “us” and “our” refer to Saratoga Investment Corp. and its wholly owned subsidiaries, Saratoga Investment Funding LLC, Saratoga Investment Funding II LLC, Saratoga Investment Corp. SBIC LP, Saratoga Investment Corp. SBIC II LP, and Saratoga Investment Corp. SBIC III LP, unless the context otherwise requires. We refer to Saratoga Investment Advisors, LLC, our investment adviser, as “Saratoga Investment Advisors,” the “Investment Adviser” or the “Manager.”

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

Some of the statements in this Annual Report constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by 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 Annual Report information available to us on the date of this Annual Report, 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 occurring after the date of this Annual Report, 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 forward-looking statements contained in this Annual Report involve risks and uncertainties, including statements as to:

 

  our future operating results;

 

  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;

 

  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 operational and financial performance of our portfolio companies, including their ability to achieve our respective objectives as a result of the current economic conditions caused by, among other things, the COVID-19 pandemic, elevated levels of inflation, and a rising interest rate environment, and the effects of the disruptions caused thereby on our ability to continue to effectively manage our business;

 

i

 

 

  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;

 

  the ability of our portfolio companies to achieve their objectives;

 

  our expected financings and investments;

 

  our regulatory structure and tax treatment, 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;

 

the impact of interest rate volatility, including the decommissioning of LIBOR, on our results, particularly because we use leverage as part of our investment strategy;

 

the impact of supply chain constraints and labor difficulties on our portfolio companies and the global economy;

 

the elevated level of inflation, and its impact on our portfolio companies and on the industries in which we invest;

 

  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.

 

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, borrowing costs and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Annual Report should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described in “Risk Factors” in this Annual Report under Item 1A. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report. 

 

ii

 

 

 

PART I  
Item 1. Business 1
Item 1A. Risk Factors 27
Item 1B. Unresolved Staff Comments 59
Item 2. Properties 59
Item 3. Legal Proceedings 59
Item 4. Mine Safety Disclosures 59
   
PART II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 60
Item 6. [Reserved] 69
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 69
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 108
Item 8. Consolidated Financial Statements and Supplementary Data 109
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 109
Item 9A. Controls and Procedures 109
Item 9B. Other Information 110
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 110
   
PART III  
Item 10. Directors, Executive Officers and Corporate Governance 111
Item 11. Executive Compensation 113
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 114
Item 13. Certain Relationships and Related Transactions, and Director Independence 115
Item 14. Principal Accounting Fees and Services 116
   
PART IV  
Item 15. Exhibits, Consolidated Financial Statement Schedules 117
Item 16. Form 10-K Summary 120
   
Signatures 121

 

iii

 

 

PART I

 

ITEM 1. BUSINESS

 

General

 

We are a specialty finance company that provides customized financing solutions to U.S middle-market businesses. We primarily invest in senior and unitranche leveraged loans and mezzanine debt and, to a lesser extent, equity issued by private U.S. middle-market companies, which we define as companies having annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) under $50 million, both through direct lending and through participation in loan syndicates. Our investment objective is to create attractive risk-adjusted returns by generating current income and long-term capital appreciation from our investments. Our investments generally provide financing for change of ownership transactions, strategic acquisitions, recapitalizations and growth initiatives in partnership with business owners, management teams and financial sponsors. Our investment activities are externally managed and advised by Saratoga Investment Advisors, LLC, a New York-based investment firm affiliated with Saratoga Partners, a middle-market private equity investment firm.

 

Our portfolio is comprised primarily of investments in leveraged loans issued by middle-market companies. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt with below investment grade or “junk” ratings or, if not rated, would be rated below investment grade or “junk” and, as a result, carry a higher risk of default. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. Term loans are loans that do not allow the borrowers to repay all or a portion of the loans prior to maturity and then re-borrow such repaid amounts under the loan again. We also invest in mezzanine debt and make equity investments in middle-market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company.

 

While our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle-market companies, we may invest up to 30.0% of our portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, including securities of companies in bankruptcy, foreign debt, private equity, securities of public companies that are not thinly traded, joint ventures 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 Investment Company Act of 1940, as amended (“1940 Act”), which includes private equity funds, to no more than 15% of its net assets.

 

As of February 28, 2023, we had total assets of $1,078.2 million and investments in 49 portfolio companies, excluding an investment in the subordinated notes of one collateralized loan obligation fund, Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”), which had a fair value of $21.2 million as of February 28, 2023, investments in the Class F-2-R-3 Note of the Saratoga CLO which as of February 28, 2023 had a fair value of $8.8 million, and investments in the Saratoga Senior Loan Fund I JV LLC (“SLF JV”) and its subsidiaries, a joint venture which as of February 28, 2023 had a fair value of $42.1 million. The overall portfolio composition as of February 28, 2023 consisted of 82.1% of first lien term loans, 1.5% of second lien term loans, 2.1% of unsecured loans, 4.3% of structured finance securities and 10.0% of equity interests. As of February 28, 2023, the weighted average yield on all of our investments, including our investment in the subordinated notes of Saratoga CLO and Class F-2-R-3 Note was approximately 12.1%. The weighted average yield of our investments is not the same as a return on investment for our stockholders and, among other things, is calculated before the payment of our fees and expenses. As of February 28, 2023, our total return based on market value was 10.35% and our total return based on net asset value (“NAV”) per share was 9.46%. As of February 28, 2022, our total return based on market value was 28.19% and our total return based on NAV was 15.88%. Total return based on market value is the change in the ending market value of the Company’s common stock plus dividends distributed during the period assuming participation in the Company’s dividend reinvestment plan divided by the beginning market value of the Company’s common stock. Total return based on NAV is the change in ending NAV per share plus dividends distributed per share paid during the period assuming participation in the Company’s dividend reinvestment plan divided by the beginning NAV per share. While total return based on NAV and total return based on market value reflect fund expenses, they do not reflect any sales load that may be paid by investors. As of February 28, 2023, approximately 96.94% of our first lien debt investments were fully collateralized in the sense that the portfolio companies in which we held such investments had an enterprise value or our investment had an asset coverage equal to or greater than the principal amount of the related debt investment. The Company uses enterprise value to assess the level of collateralization of its portfolio companies. The enterprise value of a portfolio company is determined by analyzing various factors, including EBITDA, cash flows from operations less capital expenditures and other pertinent factors, such as recent offers to purchase a portfolio company’s securities or other liquidation events. As a result, while we consider a portfolio company to be collateralized if its enterprise value exceeds the amount of our loan, we do not hold tangible assets as collateral in our portfolio companies that we would obtain in the event of a default. Our investment in the subordinated notes of Saratoga CLO represents a first loss position in a portfolio that, at February 28, 2023, was composed of $658.0 million in aggregate principal amount of predominantly senior secured first lien term loans. A first loss position means that we will suffer the first economic losses if losses are incurred on loans held by the Saratoga CLO. As a result, this investment is subject to unique risks. See Part I. 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.”

 

1

 

 

We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the 1940 Act. As a BDC, we are required to comply with various regulatory requirements, including limitations on our use of debt. We finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing, or, if we obtain the required approvals from our directors who are note “interested persons” (as defined in Section 2(a)(19) of the 1940 Act) of the Company (“independent directors”) and/or stockholders, 150%. On April 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into law on March 23, 2018, our board of directors, including, a majority of our independent directors, approved of our becoming subject to a minimum asset coverage ratio of 150% under Sections 18(a)(1) and 18(a)(2) of the 1940 Act. The 150% asset coverage ratio became effective on April 16, 2019.

 

We have elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, we generally will not be subject to U.S. federal income tax on any net ordinary income or capital gains that we timely distribute to our stockholders if we meet certain source-of-income, annual distribution and asset diversification requirements.

 

In addition, we have three wholly owned subsidiaries that are each licensed as a small business investment company (“SBIC”) and regulated by the Small Business Administration (“SBA”). 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 (the “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. On September 29, 2022, our wholly owned subsidiary, Saratoga Investment Corp. SBIC III LP (“SBIC III LP” and, together with SBIC LP and SBIC II LP, the “SBIC Subsidiaries”), also received an SBIC license from the SBA, which provides up to $175.0 million in additional long-term capital in the form of SBA-guaranteed debentures. As a result, Saratoga’s SBA relationship increased from $325.0 million to $350.0 million of committed capital. The SBIC Subsidiaries are regulated by the SBA. For two or more SBICs under common control, the maximum amount of outstanding SBA debentures cannot exceed $350.0 million. Our wholly owned SBIC Subsidiaries are able to borrow funds from the SBA against the SBIC’s regulatory capital (which generally approximates equity capital in the respective SBIC) and is subject to customary regulatory requirements, including, but not limited to, periodic examination by the SBA. See “Item 1. Business—Small Business Investment Company Regulations.”

 

We received exemptive relief from the U.S. Securities and Exchange Commission (the “SEC”) to permit us to exclude the senior securities issued by the SBIC Subsidiaries from the definition of senior securities in the asset coverage requirement under the 1940 Act. This allows the Company increased flexibility under the asset coverage requirement by permitting it to borrow up to $350.0 million more than it would otherwise be able to absent the receipt of this exemptive relief.

 

The Company has established wholly owned subsidiaries, SIA-ARC, Inc., SIA-Avionte, Inc., SIA-AX, Inc., SIA-G4, Inc., SIA-GH, Inc., SIA-MAC, Inc., SIA-PP, Inc., SIA-TG, Inc., SIA-TT, Inc., SIA-Vector, Inc. and SIA-VR, Inc., which are structured as Delaware entities. The entities are treated as corporations for U.S. federal income tax purposes and are intended to facilitate our compliance with the requirements to be treated as a RIC under the Code by holding equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass through entities). In February 2022, SIA-GH, Inc., SIA-TT Inc. and SIA-VR, Inc. received an approved plan of liquidation following the sale of equity held by each of the portfolio companies. These entities are consolidated for accounting purposes but are not consolidated for U.S. income tax purposes and may incur U.S income tax expense as a result of their ownership of portfolio companies. 

 

2

 

 

On October 26, 2021, the Company and TJHA JV I LLC (“TJHA”) entered into a Limited Liability Company Agreement (the “LLC Agreement”) to co-manage SLF JV. SLF JV is invested in Saratoga Investment Corp Senior Loan Fund 2021-1 Ltd (“SLF 2021”), which is a wholly owned subsidiary of SLF JV. SLF 2021 was formed for the purpose of making investments in a diversified portfolio of broadly syndicated first lien and second lien term loans or bonds in the primary and secondary markets. The Company and TJHA have equal voting interest on all material decisions with respect to SLF JV, including those involving its investment portfolio, and equal control of corporate governance. No management fee is charged to SLF JV as control and management of SLF JV is shared equally. The Company and TJHA have committed to provide up to a combined $50.0 million of financing to SLF JV through cash contributions, with the Company providing $43.75 million and TJHA providing $6.25 million, resulting in an 87.5% and 12.5% ownership between the two parties. The financing is issued in the form of an unsecured note and equity. The unsecured note will pay a fixed rate of 10.0% per annum and is due and payable in full on June 15, 2023. As of February 28, 2023, the Company and TJHA’s investment in SLF JV consisted of an unsecured note of $17.6 million and $2.5 million, respectively; and membership interest of $17.6 million and $2.5 million, respectively. For the year ended February 28, 2023, the Company earned $0.6 million of interest income related to SLF JV, which is included in interest income. SLF JV’s initial investment in SLF 2022 was in the form of an unsecured loan. The unsecured loan paid a floating rate of LIBOR plus 7.00% per annum and was due and payable in full on June 9, 2023. The unsecured loan was repaid in full on October 28, 2022, as part of the CLO closing. The Company has determined that SLF JV is an investment company under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services—Investment Companies; however, in accordance with such guidance the Company will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary. SLF JV is not a wholly owned investment company subsidiary as the Company and TJHA each have an equal 50% voting interest in SLF JV and thus neither party has a controlling financial interest. Furthermore, ASC Topic 810, Consolidation, concludes that in a joint venture where both members have equal decision-making authority, it is not appropriate for one member to consolidate the joint venture since neither has control. Accordingly, the Company does not consolidate SLF JV.

  

Corporate History and Information

 

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, we engaged Saratoga Investment Advisors to replace GSCP (NJ), L.P. as our investment adviser and changed our name to Saratoga Investment Corp.

 

The recapitalization transaction consisted of (i) 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 and (ii) the entry into a $40.0 million senior secured revolving credit facility with Madison Capital Funding LLC (the “Madison Credit Facility”). We used the net proceeds from the private sale of shares of our common stock and a portion of the funds available to us under the Madison 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 AG, New York Branch (“Deutsche Bank”). Specifically, in July 2009, we had exceeded permissible borrowing limits under the revolving securitized credit facility with Deutsche Bank, which resulted in an event of default under the revolving securitized credit facility. As a result of the event of default, Deutsche Bank had the right to accelerate repayment of the outstanding indebtedness under the revolving securitized credit facility and to foreclose and liquidate the collateral pledged under the revolving securitized credit facility. 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 by Saratoga Investment Advisors and certain of its affiliates the 986,842 shares of our common stock issued to them in the recapitalization.

 

The Company formed a wholly owned special purpose entity, Saratoga Investment Funding II LLC, a Delaware limited liability company (“SIF II”), to enter into a $50.0 million senior secured revolving credit facility with Encina Lender Finance, LLC (the “Lender”), supported by loans held by SIF II and pledged to the Lender under the credit facility (the “Encina Credit Facility”). The Encina Credit Facility closed on October 4, 2021. During the first two years following the closing date, SIF II may request an increase in the commitment amount under the Encina Credit Facility to up to $75.0 million. The terms of the Encina Credit Facility require a minimum drawn amount of $12.5 million at all times during the first six months following the closing date, which increases to the greater of $25.0 million or 50% of the commitment amount in effect at any time thereafter. The term of the Encina Credit Facility is three years. Advances under the Encina Credit Facility bear interest at a floating rate per annum equal to LIBOR plus 4.0%, with LIBOR having a floor of 0.75%, with customary provisions related to the selection by the Lender and the Company of a replacement benchmark rate. Concurrently with the closing of the Encina Credit Facility, all remaining amounts outstanding on the Company’s existing revolving credit facility with Madison Capital Funding, LLC were repaid and the revolving credit facility terminated. On January 27, 2023, among other things, the borrowings available under the Encina Credit Facility was increased from up to $50.0 million to up to $65.0 million, the underlying benchmark rate used to compute interest changed from LIBOR to Term SOFR for one-month tenor plus a 0.10% credit spread adjustment; the applicable effective margin rate on borrowings increased from 4.00% to 4.25% and the maturity date was extended from October 4, 2024 to January 27, 2026.

 

3

 

 

As noted above, our wholly owned subsidiaries, SBIC LP, SBIC II LP, and SBIC III LP, received an SBIC license from the SBA on March 28, 2012, August 14, 2019, and September 29, 2022, respectively. 

 

On October 26, 2021, the Company and TJHA JV I LLC entered into a Limited Liability Company Agreement to co-manage the SLF JV. SLF JV is a joint venture that invests in the debt or equity interests of collateralized loan obligations, loans, notes and other debt instruments.

 

Our corporate offices are located at 535 Madison Avenue, New York, New York 10022. Our telephone number is (212) 906-7800. We maintain a website on the Internet at www.saratogainvestmentcorp.com. Information contained on our website is not incorporated by reference into this Annual Report, and you should not consider that information to be part of this Annual Report.

 

Saratoga Investment Advisors

 

General

 

Our Investment Adviser was formed in 2010 as a Delaware limited liability company and became our investment adviser in July 2010. Our Investment Adviser is led by four principals, Christian L. Oberbeck, Michael J. Grisius, Thomas V. Inglesby, and Charles G. Phillips, with 35, 33, 36 and 26 years of experience in leveraged finance, respectively, and the Chief Financial Officer and Chief Compliance Officer, Henri Steenkamp, who has 24 years of experience in financial services and leveraged finance. Our Investment Adviser is affiliated with Saratoga Partners, a middle-market private equity investment firm. Saratoga Partners was established in 1984 to be the middle-market private investment arm of Dillon Read & Co. Inc. and has been independent of Dillon Read & Co. Inc. and its successor entity, SBC Warburg Dillon Read, since 1998. Saratoga Partners has a 34-year history of private investments in middle-market companies and focuses on public and private equity, preferred stock, and senior and mezzanine debt investments.

 

Our Relationship with Saratoga Investment Advisors

 

We utilize the personnel, infrastructure, relationships and experience of Saratoga Investment Advisors to enhance the growth of our business. We currently have no employees and each of our executive officers is also an officer of Saratoga Investment Advisors.

 

We have entered into an investment advisory and management agreement (the “Management Agreement”) with Saratoga Investment Advisors. Pursuant to the 1940 Act, the initial term of the Management Agreement was for two years from its effective date of July 30, 2010, with automatic, one-year renewals, to be approved at an in-person meeting of the board of directors, a majority of whom must be independent directors. Our board of directors approved the renewal of the Management Agreement for an additional one-year term at an in-person meeting held on July 5, 2022. Pursuant to the Management Agreement, Saratoga Investment Advisors implements our business strategy on a day-to-day basis and performs certain services for us under the direction of our board of directors. Saratoga Investment Advisors is responsible for, among other duties, performing all of our day-to-day functions, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties.

 

Saratoga Investment Advisors has formed an investment committee to advise and consult with its senior management team with respect to our investment policies, investment portfolio holdings, financing and leveraging strategies and investment guidelines. We believe that the collective experience of the investment committee members across a variety of fixed income asset classes will benefit us. The investment committee must unanimously approve all investments in excess of $1.0 million made by us. In addition, all sales of our investments must be approved by all four of our investment committee members. The current members of the investment committee are Messrs. Oberbeck, Grisius, Inglesby, and Phillips.

 

We pay Saratoga Investment Advisors a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.75% of our average gross assets, which includes assets purchased with borrowed funds but excludes cash and cash equivalents. As a result, Saratoga Investment Advisors will benefit as we incur debt or use leverage to purchase assets. Our board of directors will monitor the conflicts presented by this compensation structure by approving the amount of leverage that we may incur.

 

In addition to the base management fee, we pay Saratoga Investment Advisors an incentive fee, which consists of two parts. First, we pay Saratoga Investment Advisors an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

 

  no incentive fee in any calendar quarter in which, our pre-incentive fee income does not exceed a fixed “hurdle rate” of 1.875% per quarter; and

 

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  100.0% of our pre-incentive fee net investment income with respect to that portion of such 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 is payable to the Investment Adviser. We refer to this portion of our pre-incentive fee net investment income (which exceeds the hurdle rate but is less than or equal to 2.344%) as the “catch-up.” The “catch-up” provision is intended to provide our Investment Adviser with an incentive fee of 20.0% on all of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 2.344% in any fiscal quarter. Notwithstanding the foregoing, with respect to any period ending on or prior to December 31, 2010, our Investment Adviser was only entitled to 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeded 1.875% in any fiscal quarter without any catch-up provision; and

 

  20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter is payable to the Investment Adviser (once the hurdle is reached and the catch-up is achieved, 20.0% of all pre-incentive fee net investment income thereafter is allocated to the Investment Adviser).

 

There is no accumulation of amounts from quarter to quarter on either the hurdle rate or the parameters set by the “catch-up” mechanism or any claw back of amounts previously paid to Saratoga Investment Advisors if subsequent quarters are below the quarterly hurdle or the “catch-up” parameters. Furthermore, there is no delay of payment to Saratoga Investment Advisors if prior quarters are below the quarterly hurdle or “catch-up.”

 

Pre-incentive fee net investment income means interest income, dividend income and other income (including any other fees, such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that we receive from portfolio companies) earned during the calendar quarter, minus our operating expenses for the quarter. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses, unrealized capital appreciation or depreciation, or realized gains or losses resulting from the extinguishment of our own debt.

  

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 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.

 

We have also entered into a separate Administration Agreement (the “Administration Agreement”) with Saratoga Investment Advisors pursuant to which Saratoga Investment Advisors furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services. The Administration Agreement has an initial term of two years from its effective date of July 30, 2010, with automatic one-year renewals, subject to approval by our board of directors, a majority of whom must be our independent directors. Most recently, on July 5, 2022, 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 $3.0 million to $3.275 million effective August 1, 2022. Under the Administration Agreement, Saratoga Investment Advisors also performs, or oversees the performance of our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain, preparing reports for our stockholders and reports required to be filed with the SEC. Payments under the Administration Agreement will be equal to an amount based upon the allocable portion of Saratoga Investment Advisors’ overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our officers and their respective staffs relating to the performance of services under the Administration Agreement.

 

Investments

 

Our portfolio is comprised primarily of investments in leveraged loans (both first and second lien term loans) issued by middle-market companies. Investments in middle-market companies are generally less liquid than equivalent investments in companies with larger capitalizations. These investments are sourced in both the primary and secondary markets through a network of relationships with commercial and investment banks, commercial finance companies and financial sponsors. The leveraged loans that we purchase are generally used to finance buyouts, strategic acquisitions, growth initiatives, recapitalizations and other types of transactions. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt which are invested by companies with below investment grade or “junk” ratings or, if not rated, would be rated below investment grade or “junk” and, as a result, carry a higher risk of default. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. For a discussion of the risks pertaining to our secured investments, see Part I. Item 1A. “Risk Factors—Our investments may be risky, and you could lose all or part of your investment.”

 

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As part of our long-term strategy, we also invest in mezzanine debt and make equity investments in middle-market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company. See Part I. Item 1A. “Risk Factors—If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event our portfolio companies default on their indebtedness.”

  

Substantially all of the debt investments held in our portfolio hold a non-investment grade rating by one or more rating agencies or, if not rated, would be rated below investment grade if rated, which are often referred to as “junk.” As of February 28, 2023, 77.0% of our debt portfolio at fair value consisted of debt securities for which issuers were not required to make principal payments until the maturity of such debt securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. Such “interest-only” loans are structured such that the borrower makes only interest payments throughout the life of the loan and makes a large, “balloon payment” at the end of the loan term. The ability of a borrower to make or refinance a balloon payment may be affected by a number of factors, including the financial condition of the borrower, prevailing economic conditions, higher interest rates, and collateral values. If the interest-only loan borrower is unable to make or refinance a balloon payment, we may experience greater losses than if the loan were structured as amortizing. As of February 28, 2023, 22.5% of our interest-only loans provided for contractual PIK interest, which represents contractual interest added to a loan balance and due at the end of such loan’s term, and 46.4% of such investments elected to pay a portion of interest due in PIK. In addition, 96.9% of our debt investments at February 28, 2023, had variable interest rates that reset periodically based on benchmarks such as LIBOR, BSBY, SOFR and the prime rate. As a result, significant increases in such benchmarks in the future may make it more difficult for these borrowers to service their obligations under the debt investments that we hold.

 

As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we may not acquire any assets other than “qualifying assets” as specified in the 1940 Act unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. See “Business—Business Development Company Regulations – Qualifying Assets.”

 

While our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle-market companies, we may 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, private equity, securities of public companies that are not thinly traded, joint ventures 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% of its net assets.

 

Leveraged loans

 

Our leveraged loan portfolio is comprised primarily of first lien and second lien term loans. First lien term loans are secured by a first priority perfected security interest on all or substantially all of the assets of the borrower and typically include a first priority pledge of the capital stock of the borrower. First lien term loans hold a first priority with regard to right of payment. Generally, first lien term loans offer floating rate interest payments, have a stated maturity of five to seven years, and have a fixed amortization schedule. First lien term loans generally have restrictive financial and negative covenants. Second lien term loans are secured by a second priority perfected security interest on all or substantially all of the assets of the borrower and typically include a second priority pledge of the capital stock of the borrower. Second lien term loans hold a second priority with regard to right of payment. Second lien term loans offer either floating rate or fixed rate interest payments, generally have a stated maturity of five to eight years and may or may not have a fixed amortization schedule. Second lien term loans that do not have fixed amortization schedules require payment of the principal amount of the loan upon the maturity date of the loan. Second lien term loans have less restrictive financial and negative covenants than those that govern first lien term loans.

 

Mezzanine debt

 

Mezzanine debt usually ranks subordinate in priority of payment to senior debt and is often unsecured. However, mezzanine debt ranks senior to common and preferred equity in a borrowers’ capital structure. Mezzanine debt typically has fixed rate interest payments and a stated maturity of six to eight years and does not have fixed amortization schedules.

 

In some cases, our debt investments may provide for a portion of the interest payable to be payment-in-kind interest (“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.

 

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Equity Investments

 

Equity investments may consist of preferred equity that is expected to pay dividends on a current basis in the form of cash or additional equity or preferred equity that does not pay current dividends. Preferred equity at times may also have PIK interest payable. Preferred equity generally has a preference over common equity as to distributions on liquidation and dividends. In some cases, we may acquire common equity. In general, our equity investments are not control-oriented investments and we expect that in many cases we will acquire equity securities as part of a group of private equity investors in which we are not the lead investor.

 

Opportunistic Investments

 

Opportunistic investments may include investments in distressed debt, which may include securities of companies in bankruptcy, debt and equity securities of public companies that are not thinly traded, emerging market debt, structured finance vehicles such as collateralized loan obligation funds and debt of middle-market companies located outside the United States.

 

On January 22, 2008, GSC Group, Inc., as asset manager, with Lehman Brothers raising the financing, entered into a collateral management agreement with Saratoga CLO. Saratoga CLO was structured with five tranches of debt, plus residual notes. Saratoga CLO’s five tranches of debt were purchased by a wide variety of CLO debt market participants. In addition, we purchased for $30.0 million all of the outstanding subordinated notes of Saratoga CLO.

 

Pursuant to its terms, the investment period for Saratoga CLO ended in January 2013, and certain restrictions in such terms limited portfolio reinvestment. As a result, the Company determined that it was in its best interest to refinance Saratoga CLO given its investment attractiveness, and has refinanced this multiple times since then. The Company did not originate any of the loan assets included in the formation of Saratoga CLO, nor has it done so since the subsequent refinancing transactions. Moreover, the Company does not expect to originate any of the loans in the Saratoga CLO portfolio prospectively. The Company has from time to time co-invested in loans with the Saratoga CLO. The Company currently has no co-investments between it and Saratoga CLO.

 

With respect to our advisory services to Saratoga CLO, and in particular the underwriting standards used when determining which investments qualify for inclusion in the Saratoga CLO, they are substantially similar to the process employed in selecting the Company’s investments. All of the credit metrics for a Saratoga CLO investment are reviewed and documented in the same manner as they would be for an investment for the Company, with some minor differences. For example, the Saratoga CLO investment process also includes multiple rating agency review and analysis of the loan investment and the assigned corporate ratings, which typically does not apply to a prospective investment of the Company. Lastly, a Saratoga CLO investment also considers the likely secondary liquidity of the loan in considering the investment, whereas the Company’s investments are generally illiquid.

 

The Saratoga CLO investment period was initially refinanced in October 2013 and 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 “2013-1 Reset CLO Notes”). This refinancing, among other things, extended the non-call period and reinvestment period to January 20, 2020 and January 20, 2021, respectively, and extended its legal final date to January 20, 2030. 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. As part of the refinancing of its liabilities, we 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 of the Saratoga CLO at par, with a coupon of LIBOR plus 8.75% and LIBOR plus 10.00%, respectively. We also redeemed our existing $4.5 million aggregate principal amount of the Class F Notes tranche of the Saratoga CLO at par. The Class F-R-2 Notes and Class G-R-2 Notes tranches are the seventh and eighth tranches in the capital structure of Saratoga CLO and are subordinated to the other debt classes of Saratoga CLO, respectively. The Class F-R-2 and Class G-R-2 tranches are senior to the subordinated notes, which is effectively the equity position in Saratoga CLO. As a result, the other tranches of debt in Saratoga CLO rank ahead of the $2.5 million Class F-R-2 tranche and $7.5 million Class G-R-2 tranche and ahead of the aggregate principal amount of our position in the subordinated notes, with respect to priority of payments in the event of a default or a liquidation. We also purchased an aggregate principal amount of $39.5 million of subordinated notes, which is in addition to the $30.0 million of subordinated notes issued in 2013 that were reset with an extended legal final date to January 20, 2030. Following the refinancing, Saratoga Investment Corp. owns 100% of the Class F-R-2, Class G-R-2 and the subordinated notes of the Saratoga CLO. On February 11, 2020, we 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. On October 23, 2020, the CLO 2013-1 Warehouse 2 Loan was increased to $25.0 million availability, which was immediately fully drawn. The interest rate was also amended to be based on a pricing grid, starting at an annual rate of 3M USD LIBOR + 4.46%. On February 26, 2021, the Company completed the fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024, and extended its legal maturity to April 2033. A non-call period ending February 2022 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. On August 9, 2021, the Company exchanged its existing $17.9 million Class F-R-3 Notes for $8.5 million Class F-1-R-3 Notes and $9.4 million Class F-2-R-3 Notes at par. On August 11, 2021, the Company sold its Class F-1-R-3 Notes to third parties, resulting in a realized loss of $0.1 million. At August 31, 2021, the outstanding receivable of $2.6 million was repaid in full. After the reinvestment period ends in April 2024, the Company will consider refinancing the Saratoga CLO, subject to market conditions. A refinancing transaction entails finding existing and new investors that are willing to provide debt financing to Saratoga CLO which extends the investment period of the CLO on terms that are acceptable to it and in an amount sufficient to allow it to repay all of its existing debt holders. If Saratoga CLO is unable to refinance its indebtedness by April 2024, then Saratoga CLO will be required to use investment repayments by portfolio companies received thereafter to repay its outstanding indebtedness.

 

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At February 28, 2023, the aggregate fair value of our investments in Saratoga Investment Corp. CLO 2013-1 F-2-R-3 Notes and subordinated notes of the Saratoga CLO was $8.8 million and $21.2 million, respectively.

 

The terms of the subordinated notes of Saratoga CLO entitles the Company to the residual net interest income in Saratoga CLO, which is paid on a quarterly basis after payment of all expenses, assuming that the Saratoga CLO remains in compliance with its various debt and rating agency compliance tests. The Company’s investment in the subordinated notes of Saratoga CLO can be sold or transferred at any time. The Company has held 100% of the subordinated notes of Saratoga CLO since the inception of Saratoga CLO.

 

Generally, the interests of the holders of the various classes of securities issued by the Saratoga CLO are aligned with the interests of the Company as holder of the subordinated notes. The investors in the various debt tranches of the securities issued by the Saratoga CLO are interested in the regular payment of interest income from the Saratoga CLO and the overcollateralization of the underlying loan assets relative to the Saratoga CLO debt issued. On the other hand, the subordinated note holders might prefer purchasing higher yielding riskier assets that could increase returns while the returns of the holders of the debt securities remain unchanged.

 

With respect to the collateral management agreement that the Company has entered into with Saratoga CLO, while the agreement is similar to the investment advisory and management agreement between the Company and Saratoga Investment Advisors in that it is an asset management agreement, there are material differences between the two. For example, pursuant to Section 15 of the 1940 Act, the Management Agreement with Saratoga Investment Advisors has an initial term of two years, with annual renewals to be approved at an in-person meeting of the Company’s board of directors. The contract can be terminated by the Company’s board of directors or stockholders with 60 days’ notice, with no penalty for termination. The collateral management agreement that the Company has entered into with Saratoga CLO, on the other hand, has no renewal requirement. The Saratoga CLO collateral management agreement may be terminated for cause at the direction of a majority of the most senior class of the Saratoga CLO securities then outstanding, excluding any securities held by the Company or any affiliate thereof or any other entity over which the Company or an affiliate thereof has discretionary authority over voting such securities, which securities are disregarded for this purpose. If the Saratoga CLO collateral management agreement is terminated, the manager remains in place until a new manager is appointed by the issuer at the direction of either (i) a majority of the Saratoga CLO subordinated notes, and not rejected by a majority of the most senior class of CLO securities then outstanding, or (ii)  a majority of the most senior class of CLO securities then outstanding, and not rejected by a majority of the Saratoga CLO subordinated notes, in each case within 20 days of notice of a vote regarding the successor manager. If no successor investment manager shall have been appointed within 120 days after the date of notice of resignation by the investment manager, the resigning investment manager, a majority of the controlling class or a majority of the subordinated notes may petition any court of competent jurisdiction for the appointment of a successor investment manager without the approval of the holders of the notes. 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%.

 

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The securities issued by the Saratoga CLO do not have any external credit enhancement features that would minimize the potential losses to the subordinated notes. Saratoga CLO recognized realized losses on extinguishment of debt of approximately $3.0 million, $1.2 million, $6.1 million and $3.4 million in the fiscal years ended February 28, 2021, February 28, 2019, February 28, 2017 and February 28, 2014, respectively, related to the February 2021, December 2018, November 2016 and October 2013 refinancing, primarily as a result of repurchasing securities at par at the refinancing that was previously issued at a discount, as well as the acceleration of the amortization of the legal and accounting costs associated with the refinancing. The cost of the refinancing was effectively borne by the Company as the holder of the subordinated notes in Saratoga CLO. The indenture for the Saratoga CLO contemplates the issuance of additional securities from time to time, pursuant to an amendment to the indenture and subject to various requirements and conditions, including the consent of the Company (in its capacity as investment manager) and the consent of the of the holders of a majority of the subordinated notes (all of which are held by the Company) and, except in certain limited circumstances, the consent of the holders of a majority (by principal amount) the Class A-1 Notes. The Saratoga CLO could also issue additional securities pursuant to a refinancing of the existing securities. The costs of any such future refinancing would effectively be borne by the Company as the holder of the subordinated notes in Saratoga CLO. On August 9, 2021, the Company exchanged its existing $17.9 million Class F-R-3 Notes for $8.5 million Class F-1-R-3 Notes and $9.4 million Class F-2-R-3 Notes at par. On August 11, 2021, the Company sold its Class F-1-R-3 Notes to third parties, resulting in a realized loss of $0.1 million.

 

The Company does not believe that any representations or warranties made by the Company as manager of Saratoga CLO or investor in the subordinated notes could materially affect the Company. However, because the Company acts as the collateral manager to Saratoga CLO, it may be subject to claims by third-party investors in Saratoga CLO for alleged or actual negligent acts, errors or omissions or breach of fiduciary duties committed in the scope of performing its services as the collateral manager.

 

As of February 28, 2023, the Saratoga CLO portfolio consisted of $658.0 million in aggregate principal amount of primarily senior secured first lien term loans. At February 28, 2023, 96.2% of the Saratoga CLO portfolio consisted of such loans to 345 borrowers with an average exposure to each borrower of $1.8 million. The weighted average maturity of the portfolio is 4.36 years. In addition, Saratoga CLO held $23.8 million in cash at February 28, 2023. Our investments in the Saratoga CLO falls into our 30% “bucket” of non-qualifying assets under the 1940 Act and currently has an aggregate cost basis of approximately $32.3 million, which is net of all principal payments made by Saratoga CLO on the Company’s total investment in the subordinate notes of Saratoga CLO is $57.8 which consists of additional investments of $30 million in January 2008, $13.8 million in December 2018 and $14.0 million in February 2021.

 

On October 26, 2021, the Company and TJHA JV I LLC entered into the LLC Agreement to co-manage SLF JV. SLF JV is a joint venture that invests in the debt or equity interests of collateralized loan obligations, loans, notes and other debt instruments. As of February 28, 2023, the Company has membership interests with a fair value of $13.1 million and an unsecured loan with a fair value of $17.6 million in the SLF JV, and an investment in the Class E notes of the SLF JV’s wholly owned CLO (“SLF 2022”) with a fair value of $11.4 million. As of February 28, 2023, the SLF JV has an investment in the subordinated debt of SLF 2022 with a fair value of $34.3 million.

 

Prospective portfolio company characteristics

 

Our Investment Adviser generally selects portfolio companies with one or more of the following characteristics:

 

  a history of generating stable earnings and strong free cash flow;

 

  well-constructed balance sheets with the ability to withstand industry cycles, supported by sustainable enterprise values;

 

  reasonable debt-to-cash flow multiples;

 

  exceptional management with meaningful stake;

 

  industry leadership with competitive advantages and sustainable market shares and growth prospects in attractive and healthy sectors; and

 

  capital structures that provide appropriate terms and reasonable covenants.

 

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Investment selection

 

In managing us, Saratoga Investment Advisors employs the same investment philosophy and portfolio management methodologies used by Saratoga Partners. Through this investment selection process, based on quantitative and qualitative analysis, Saratoga Investment Advisors seeks to identify portfolio companies with superior fundamental risk-reward profiles and strong, defensible business franchises with the goal of minimizing principal losses while maximizing risk-adjusted returns. Saratoga Investment Advisors’ investment process emphasizes the following:

 

  bottom-up, company-specific research and analysis;

 

  capital preservation, low volatility and minimization of downside risk; and

 

  investing with experienced management teams that hold meaningful equity ownership in their businesses.

 

Our Investment Adviser’s investment process generally includes the following steps:

 

  Initial screening. A brief analysis identifies the investment opportunity and reviews the merits of the transaction. The initial screening memorandum provides a brief description of the company, its industry, competitive position, capital structure, financials, equity sponsor and deal economics. If the deal is determined to be attractive by the senior members of the deal team, the opportunity is fully analyzed.

 

  Full analysis. A full analysis includes:

 

  Business and Industry analysis—a review of the company’s business position, competitive dynamics within its industry, cost and growth drivers and technological and geographic factors. Business and industry research often includes meetings with industry experts, consultants, other investors, customers and competitors.

 

  Company analysis—a review of the company’s historical financial performance, future projections, cash flow characteristics, balance sheet strength, liquidation value, legal, financial and accounting risks, contingent liabilities, market share analysis and growth prospects.

 

  Structural/security analysis—a thorough legal document analysis including but not limited to an assessment of financial and negative covenants, events of default, enforceability of liens and voting rights.

 

  Approval of the investment committee. The investment is then presented to the investment committee for approval. The investment committee must unanimously approve all investments in excess of $1 million made by us. In addition, all sales of our investments must be approved by all four of our investment committee members. The members of our investment committee are Christian L. Oberbeck, Michael J. Grisius, Thomas V. Inglesby, and Charles G. Phillips.

 

Investment structure

 

In general, our Investment Adviser intends to select investments with financial covenants and terms that reduce leverage over time, thereby enhancing credit quality. These methods include:

 

  maintenance leverage covenants requiring a decreasing ratio of debt to cash flow;

 

  maintenance cash flow covenants requiring an increasing ratio of cash flow to the sum of interest expense and capital expenditures; and

 

  debt incurrence prohibitions, limiting a company’s ability to re-lever.

 

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In addition, limitations on asset sales and capital expenditures should prevent a company from changing the nature of its business or capitalization without our consent.

 

Our Investment Adviser seeks, where appropriate, to limit the downside potential of our investments by:

 

  requiring a total return on our investments (including both interest and potential equity appreciation) that compensates us for credit risk;

 

  requiring companies to use a portion of their excess cash flow to repay debt;

 

  selecting investments with covenants that incorporate call protection as part of the investment structure; and

 

  selecting investments with affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights, including either observation or participation rights.

 

Valuation process

 

We account for our investments at fair value in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), as determined in good faith using written policies and procedures adopted by our board of directors. Investments for which market quotations are readily available are recorded in our consolidated financial statements at such market quotations 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 determined in good faith by our board of directors based on input from Saratoga Investment Advisors, our audit committee and an independent valuation firm engaged by our board of directors. We use multiple techniques for determining fair value based on the nature of the investment and experience with those types of investments and specific portfolio companies. The selections of the valuation techniques and the inputs and assumptions used within those techniques often require subjective judgements and estimates. These techniques include market comparables, discounted cash flows and enterprise value waterfalls. Fair value is best expressed as a range of values from which the Company determines a single best estimate. The types of inputs and assumptions that may be considered in determining the range of values of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis and volatility in future interest rates, call and put features, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flows 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 the 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, the Class F-2-R-3 Notes tranche of the Saratoga CLO and the Class E Notes tranche of the SLF 2022 every quarter.

 

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 Investment Adviser 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 Investment Adviser, independent valuation firm (to the extent applicable) and the audit committee of our board of directors.

 

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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 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. 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.

 

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. Our NAV 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.

 

In December 2020, the U.S. Securities and Exchange Commission (the “SEC”) adopted new Rule 2a-5 under the 1940 Act (“Rule 2a-5”) that establishes a regulatory framework for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits boards, subject to board oversight and certain other conditions, to designate the investment adviser to perform fair value determinations. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must determine the fair value of a security. The SEC also adopted new Rule 31a-4 under the 1940 Act (“Rule 31a-4”) that provides the recordkeeping requirements associated with fair value determinations. Finally, the SEC rescinded previously issued guidance on related issues, including the role of the board in determining fair value and the accounting and auditing of fund investments. Rule 2a-5 and Rule 31a-4 became effective on March 8, 2021, and had a compliance date of September 8, 2022. While our board of directors has not elected to designate Saratoga Investment Advisors as the valuation designee, the Company has adopted certain revisions to its valuation policies and procedures in order comply with the applicable requirements of Rule 2a-5 and Rule 31a-4.

  

Ongoing relationships with and monitoring of portfolio companies

 

Saratoga Investment Advisors will closely monitor each investment we make and, when appropriate, will conduct a regular dialogue with both the management team and other debtholders and seek specifically tailored financial reporting. In addition, in certain circumstances, senior investment professionals of Saratoga Investment Advisors may take board seats or board observation seats.

 

Distributions

 

Our distributions, if any, will be determined by our board of directors and paid out of assets legally available for distribution. Any such distributions generally will be taxable to our stockholders, including to those stockholders who receive additional shares of our common stock pursuant to our dividend reinvestment plan. Prior to January 2009, we paid quarterly dividends to our stockholders. However, in January 2009, we suspended the practice of paying quarterly dividends to our stockholders and thereafter paid five annual dividend distributions (December 2013, 2012, 2011, 2010 and 2009) to our stockholders since such time, which distributions were made with a combination of cash and the issuance of shares of our common stock as discussed more fully below.

 

On September 24, 2014, we announced the recommencement of quarterly dividends to our stockholders and have subsequently made distributions under this new policy. 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.

 

In order to maintain our tax treatment as a RIC, we generally must, for each fiscal year, timely distribute an amount equal to at least 90% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. In addition, we will be subject to a non-deductible 4% U.S. federal excise tax to the extent we do not distribute during the calendar year at least (1) 98% of our net ordinary income for the calendar year, (2) 98.2% of our capital gain net income for the one year period ending on October 31 of the calendar year and (3) any net ordinary income and capital gain net income that we recognized for preceding years, but were not distributed during such years, and on which we paid no U.S. federal income tax. For the 2022 calendar year, the Company did not make sufficient distributions such that we did incur the U.S. federal excise tax. We may elect to not distribute a portion of our ordinary income for the 2023 calendar year and/or portion of the capital gains in excess of capital losses realized during the one-year period ending October 31, 2023, if any, and, if we do so, we would expect to incur U.S. federal excise taxes as a result.

 

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We may distribute taxable dividends that are payable in cash or shares of our common stock at the election of each stockholder. Under 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. If too many stockholders elect to receive their distributions in cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive the lesser of (a) the portion of the distribution such shareholder has elected to receive in cash or (b) an amount equal to his or her entire distribution times the percentage limitation on cash available for distribution. 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. Stockholders receiving such distributions will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain or qualified dividend income to the extent such distribution is properly reported as such) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result of receiving distributions in the form of our common stock, a U.S. stockholder may be required to pay tax with respect to such distributions in excess of any cash received. If a U.S. stockholder sells the stock he or she receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock. 

 

Competition

 

Our primary competitors in providing financing to private middle-market companies include public and private investment funds (including private equity funds, mezzanine funds, BDCs and SBICs), commercial and investment banks and commercial financing companies. Additionally, alternative investment vehicles, such as hedge funds, frequently invest in middle-market companies. As a result, competition for investment opportunities at middle-market companies can be intense, and in the past couple of years we believe there has been an increase in the amount of debt capital available on average. This has resulted in a somewhat more competitive environment for making new investments. Many middle-market companies are still unable to raise senior debt financing through traditional large financial institutions, and we believe this approach to financing remains difficult as implementation of U.S. and international financial reforms, such as Basel 3, limits the capacity of large financial institutions to hold non-investment grade leveraged loans on their balance sheets. We believe that many of these financial institutions have deemphasized their service and product offerings to middle-market companies in particular.

  

Many of our competitors are substantially larger and have considerably greater financial and marketing resources than us. For example, some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which may allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or that the Code imposes on us as a RIC. We use the industry information available to the investment professionals of Saratoga Investment Advisors to assess investment risks and determine appropriate pricing for our investments in portfolio companies. In addition, we believe that the investment professionals of our Investment Adviser enable us to learn about, and compete effectively for, financing opportunities with attractive leveraged companies in the industries in which we seek to invest.

 

For additional information concerning the competitive risks we face, please see Part I. Item 1A. “Risk Factors—We operate in a highly competitive market for investment opportunities.”

 

Staffing

 

We do not currently have any employees and do not expect to have any employees in the future. Services necessary for our business are provided by individuals who are employees of Saratoga Investment Advisors, pursuant to the terms of the Management Agreement and the Administration Agreement. For a discussion of the Management Agreement, see “Business—Investment Advisory and Management Agreement” below. We reimburse Saratoga Investment Advisors for our allocable portion of expenses incurred by it in performing its obligations under the Administration Agreement, including rent and our allocable portion of the cost of our officers and their respective staffs, subject to certain limitations. For a discussion of the Administration Agreement, see “Business—Administration Agreement” below.

 

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Investment Advisory and Management Agreement

 

Saratoga Investment Advisors serves as our investment adviser. Our Investment Adviser was formed in 2010 as a Delaware limited liability company and became our investment advisor in July 2010. Subject to the overall supervision of our board of directors, Saratoga Investment Advisors manages our day-to-day operations and provides investment advisory and management services to us. Under the terms of the Management Agreement, Saratoga Investment Advisors:

 

  determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;

 

  identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies);

 

  closes and monitors the investments we make; and

 

  determines the securities and other assets that we purchase, retain or sell.

 

Saratoga Investment Advisors services under the Management Agreement are not exclusive, and it is free to furnish similar services to other entities.

  

Management Fee and Incentive Fee

 

Pursuant to the Management Agreement with Saratoga Investment Advisors, we pay Saratoga Investment Advisors a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee.

 

The base management fee is paid quarterly in arrears, and equals 1.75% per annum of our gross assets (other than cash or cash equivalents but including assets purchased with borrowed funds) and calculated at the end of each fiscal quarter based on the average value of our gross assets (other than cash or cash equivalents but including assets purchased with borrowed funds) as of the end of such fiscal quarter and the end of the immediate prior fiscal quarter. Base management fees for any partial month or quarter are appropriately pro-rated.

 

The incentive fee has the following two parts:

 

The first part is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding fiscal quarter. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement, and any interest expense and dividends paid on any issued and outstanding preferred stock or debt security, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as market discount, debt instruments with PIK interest, preferred stock with PIK dividends and zero-coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses, unrealized capital appreciation or depreciation or realized gains or losses resulting from the extinguishment of our own debt. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less liabilities) at the end of the immediately preceding fiscal quarter, is compared to a “hurdle rate” of 1.875% per quarter, subject to a “catch up” provision. The base management fee is calculated prior to giving effect to the payment of any incentive fees.

 

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We pay Saratoga Investment Advisors an incentive fee with respect to our pre-incentive fee net investment income in each fiscal quarter as follows: (A) no incentive fee in any fiscal quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate; (B) 100.0% of our pre-incentive fee net investment income with respect to that portion of such 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 is payable to Saratoga Investment Advisors; and (C) 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter. We refer to the amount specified in clause (B) as the “catch-up.” The “catch-up” provision is intended to provide Saratoga Investment Advisors with an incentive fee of 20.0% on all of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 2.344% in any fiscal quarter. Notwithstanding the foregoing, with respect to any period ending on or prior to December 31, 2010, Saratoga Investment Advisors was only entitled to 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeded 1.875% in any fiscal quarter without any catch-up provision. These calculations are appropriately pro-rated when such calculations are applicable for any period of less than three months.

 

The following is a graphical representation of the calculation of the income-related portion of the incentive fee subsequent to any period ending after December 31, 2010:

 

Quarterly Incentive Fee Based on “Pre-Incentive Fee Net Investment Income”

 

Pre-Incentive Fee Net Investment Income

(expressed as a percentage of the value of net assets)

 

 

 

Percentage of Pre-Incentive Fee Net Investment

Income allocated to income-related portion of incentive fee

  

The second part of the incentive fee, the capital gains fee, is determined and payable in arrears as of the end of each fiscal year (or, upon termination of the Management Agreement), and is calculated at the end of each applicable fiscal year by subtracting (1) the sum of our cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) our cumulative aggregate realized capital gains, in each case calculated from May 31, 2010 on each investment in the Company’s portfolio. If such amount is positive at the end of such year, then the capital gains fee for such year is equal to 20.0% of such amount, less the cumulative aggregate amount of capital gains fees paid in all prior years. If such amount is negative, then there is no capital gains fee for such year.

 

Under the Management Agreement, 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 Saratoga Investment Advisors will be entitled to 20.0% of net capital gains that arise after May 31, 2010. In addition, the cost basis for computing our realized gains and losses on investments held by us as of May 31, 2010 equals the fair value of such investments as of such date.

 

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Examples of Quarterly Incentive Fee Calculation

 

Example 1: Income Related Portion of Incentive Fee(1):

 

Assumptions

 

  Hurdle rate(2) = 1.875%

 

  Management fee(3) = 0.4375%

 

  Other expenses (legal, accounting, custodian, transfer agent, etc.)(4) = 0.33%

 

Alternative 1

 

Additional Assumptions

 

  Investment income (including interest, dividends, fees, etc.) = 1.25%

 

  Pre-incentive fee net investment income (investment income–(management fee + other expenses)) = 0.4825% Pre-incentive fee net investment income does not exceed hurdle rate, therefore there is no incentive fee.

 

Alternative 2

 

Additional Assumptions

 

  Investment income (including interest, dividends, fees, etc.) = 3.0%

 

  Pre-incentive fee net investment income (investment income–(management fee + other expenses)) = 2.2325%

 

Pre-incentive fee net investment income exceeds hurdle rate, but does not fully satisfy the “catch-up” provision, therefore the income related portion of the incentive fee is 0.3575%.

 

Incentive Fee  = (100.0% × (pre-incentive fee net investment income–1.875%)
  = 100.0%(2.2325%–1.875%)
  = 100.0%(0.3575%)
  = 0.3575%

 

 

(1)The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets.

(2)Represents 7.5% hurdle rate.

(3)Represents 1.75% annualized management fee. For the purposes of this example, we have assumed that we have not incurred any indebtedness and that we maintain no cash or cash equivalents.

(4)The “catch-up” provision is intended to provide our Investment Adviser with an incentive fee of 20.0% on all pre-incentive fee net investment income as if a hurdle rate did not apply when our net investment income exceeds 2.344% in any fiscal quarter.

  

Alternative 3

 

Additional Assumptions

 

  Investment income (including interest, dividends, fees, etc.) = 3.5%

 

  Pre-Incentive Fee Net Investment Income (investment income–(management fee + other expenses) = 2.7325%

 

Pre-incentive fee net investment income exceeds the hurdle rate, and fully satisfies the “catch-up” provision, therefore the income related portion of the incentive fee is 0.5467%.

 

Incentive fee = 100.0% × pre-incentive fee net investment income (subject to “catch-up”)(4)
Incentive fee = 100.0% × “catch-up” + (20.0% × (Pre-incentive fee net investment income–2.344%))
Catch up = 2.344%–1.875%
  = 0.469%
Incentive fee = (100.0% × 0.469%) +(20.0% ×(2.7325%–2.344%))
  = 0.469% +(20.0% × 0.3885%)
  = 0.469% + 0.0777%
  = 0.5467%

 

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Example 2: Capital Gains Portion of Incentive Fee:

 

Alternative 1

 

Assumptions(1)

 

  Year 1: $20.0 million investment made in Company A (“Investment A”), and $30.0 million investment made in Company B (“Investment B”)

 

  Year 2: Investment A is sold for $50.0 million and fair market value (“FMV”) of Investment B determined to be $32.0 million

 

  Year 3: FMV of Investment B determined to be $25.0 million

 

  Year 4: Investment B sold for $31.0 million

 

The capital gains portion of the incentive fee, if any, calculated under the cumulative method would be:

 

  Year 1: None

 

  Year 2: $6 million (20.0% multiplied by $30.0 million realized capital gains on sale of Investment A)

 

  Year 3: None; $5 million (20.0% multiplied by ($30.0 million realized cumulative capital gains less $5.0 million cumulative capital depreciation)) less $6.0 million (capital gains incentive fee paid in Year 2)

 

  Year 4: $200,000; $6.2 million (20.0% multiplied by $31.0 million cumulative realized capital gains) less $6.0 million (capital gains incentive fee paid in Year 2)

 

Alternative 2

 

Assumptions(1)

 

  Year 1: $20.0 million investment made in Company A (“Investment A”), $30.0 million investment made in Company B (“Investment B”) and $25.0 million investment made in Company C (“Investment C”)

 

  Year 2: Investment A sold for $50.0 million, FMV of Investment B determined to be $25.0 million and FMV of Investment C determined to be $25.0 million

 

  Year 3: FMV of Investment B determined to be $27.0 million and Investment C sold for $30.0 million

 

 

(1)The examples assume that Investment A and Investment B were acquired by us subsequent to May 31, 2010. If Investment A and B were acquired by us prior to May 31, 2010, then the cost basis for computing our realized gains and losses on such investments would equal the fair value of such investments as of May 31, 2010.

  

  Year 4: FMV of Investment B determined to be $35.0 million

 

  Year 5: Investment B sold for $20.0 million

 

The capital gains portion of the incentive fee, if any, calculated under the cumulative method would be:

 

  Year 1: None

 

  Year 2: $5.0 million (20.0% multiplied by $25.0 million ($30.0 million realized capital gains on Investment A less $5.0 million unrealized capital depreciation on Investment B))

 

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  Year 3: $1.4 million ($6.4 million (20.0% multiplied by $32.0 million ($35.0 million cumulative realized capital gains less $3.0 million unrealized capital depreciation)) less $5.0 million (capital gains incentive fee paid in Year 2))

 

  Year 4: None

 

  Year 5: None ($5.0 million (20.0% multiplied by $25.0 million (cumulative realized capital gains of $35.0 million less realized capital losses of $10.0 million)) less $6.4 million (cumulative capital gains incentive fee paid in Year 2 and Year 3))

 

The Management Agreement with Saratoga Investment Advisors was approved by our board of directors at an in-person meeting of the directors, including a majority of our independent directors, and was approved by our stockholders at the special meeting of stockholders held on July 30, 2010. Subsequent to then, our board of directors has approved the renewal of the Management Agreement annually for an additional one-year term every year, with the last renewal approved at an in-person meeting on July 5, 2022. 

 

In approving renewal of the Management Agreement for an additional one-year term, the directors considered, among other things, (i) the nature, extent and quality of the advisory and other services to be provided to us by Saratoga Investment Advisors; (ii) our investment performance and the investment performance of Saratoga Investment Advisors; (iii) the expected costs of the services to be provided by Saratoga Investment Advisors (including management fees, advisory fees and expense ratios) as compared to other companies within the industry, and the profits expected to be realized by Saratoga Investment Advisors; (iv) the limited potential for economies of scale in investment management associated with managing us; and (v) Saratoga Investment Advisors estimated pro forma profitability with respect to managing us.

 

Payment of our expenses

 

The Management Agreement provides that all investment professionals of Saratoga Investment Advisors and its staff, when and to the extent engaged in providing investment advisory services required to be provided by Saratoga Investment Advisors, and the compensation and routine overhead expenses of such personnel allocable to such services, will be provided and paid for by Saratoga Investment Advisors and not by us.

 

We bear all costs and expenses of our operations and transactions, including those relating to:

 

  organization;

 

  calculating our NAV (including the cost and expenses of any independent valuation firm);

 

  expenses incurred by our Investment Adviser payable to third parties, including agents, consultants or other advisers, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies;

 

  expenses incurred by our Investment Adviser 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;

 

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  U.S. 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 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 the Administration Agreement, including rent and the allocable portion of the cost of our officers and their respective staffs (including travel expenses)).

 

Duration and Termination

 

The Management Agreement will remain in effect continuously, unless terminated under the termination provisions of the Management Agreement. The Management Agreement provides that it may be terminated at any time, without the payment of any penalty, upon 60 days written notice, by the vote of stockholders holding a majority of our outstanding voting securities, or by the vote of our directors or by Saratoga Investment Advisors.

 

The Management Agreement will, unless terminated as described above, continue in effect from year to year so long as it is approved at least annually by (i) the vote of the board of directors, or by the vote of stockholders holding a majority of our outstanding voting securities, and (ii) the vote of a majority of our directors who are not parties to the Management Agreement or “interested persons” (as such term is defined in Section 2(a)(19) of the 1940 Act) of any party to such agreement, in accordance with the requirements of the 1940 Act.

 

Indemnification

 

Under the Management Agreement, Saratoga Investment Advisors and certain of its affiliates are not liable to us for any action taken or omitted to be taken by Saratoga Investment Advisors in connection with the performance of any of its duties or obligations under the agreement or otherwise as an investment adviser to us, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation for services and except to the extent such action or omission constitutes gross negligence, willful misfeasance, bad faith or reckless disregard of its duties and obligations under the agreement.

 

We also provide indemnification to Saratoga Investment Advisors and certain of its affiliates for damages, liabilities, costs and expenses incurred by them in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding arising out of or otherwise based upon the performance of any of its duties or obligations under the agreement or otherwise as an investment adviser to us. However, we would not provide indemnification against any liability to us or our security holders to which Saratoga Investment Advisors or such affiliates would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of any such person’s duties or by reason of the reckless disregard of its duties and obligations under the agreement.

 

Organization of the Investment Adviser

 

Saratoga Investment Advisors is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The principal executive offices of Saratoga Investment Advisors are located at 535 Madison Avenue, New York, New York 10022.

 

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Administration Agreement

 

Pursuant to a separate Administration Agreement, Saratoga Investment Advisors, who also serves as our administrator, furnishes us with office facilities, equipment and clerical, book-keeping and record keeping services. Under the Administration Agreement, our administrator also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain, preparing reports for our stockholders and reports required to be filed with the SEC. In addition, our administrator assists us in determining and publishing our NAV, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Payments under the Administration Agreement equal an amount based upon our allocable portion of our administrator’s overhead in performing its obligations under the Administration Agreement, including rent and our allocable portion of the cost of our officers and their respective staffs relating to the performance of services under this agreement (including travel expenses). Our allocable portion is based on the proportion that our total assets bears to the total assets administered or managed by our administrator. Under the Administration Agreement, our administrator also provides managerial assistance, on our behalf, to those portfolio companies who accept our offer of assistance. The Administration Agreement may be terminated by either party without penalty upon 60 days written notice to the other party. Our board of directors, including a majority of independent directors, will annually review the compensation we pay to the Adviser to determine that the provisions of the Administrative Agreement are carried out satisfactorily and to determine, among other things, whether the fees payable under such agreement are reasonable in light of the services provided. Our board of directors reviews the methodology employed in determining how the expenses are allocated to us and any proposed allocation of administrative expenses among us and any affiliates of the Adviser. Our board of directors then assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of the administrative services as compared to the estimated cost to us of obtaining similar services from third-party service providers known to be available. In addition, our board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of directors compares the total amount paid to the Adviser for such services as a percentage of our net assets to the same ratio as reported by other comparable funds. Most recently, on July 5, 2022, 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 $3.0 million to $3.275 million effective August 1, 2022.

 

Indemnification

 

Under the Administration Agreement, Saratoga Investment Advisors and certain of its affiliates are not liable to us for any action taken or omitted to be taken by Saratoga Investment Advisors in connection with the performance of any of its duties or obligations under the agreement.

 

We also provide indemnification to Saratoga Investment Advisors and certain of its affiliates for damages, liabilities, costs and expenses incurred by them in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding arising out of or otherwise based upon the performance of any of its duties or obligations under the agreement or otherwise as an administrator to us. However, we do not provide indemnification against any liability to us or our security holders to which Saratoga Investment Advisors or such affiliates would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of any such person’s duties or by reason of the reckless disregard of its duties and obligations under the agreement.

 

License Agreement

 

We entered into a trademark license agreement with Saratoga Investment Advisors, pursuant to which Saratoga Investment Advisors grants us a non-exclusive, royalty-free license to use the name “Saratoga.” Under this agreement, we have a right to use the “Saratoga” name, for so long as Saratoga Investment Advisors or one of its affiliates remains our Investment Adviser. Other than with respect to this limited license, we have no legal right to the “Saratoga” name. Saratoga Investment Advisors has the right to terminate the license agreement if it is no longer acting as our investment adviser. In the event the Management Agreement is terminated, we would be required to change our name to eliminate the use of the name “Saratoga.”

 

Business Development Company Regulations

 

We have elected to be treated as a BDC under the 1940 Act. As with other companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those affiliates or underwriters, and requires that a majority of the directors be independent directors. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC, unless approved by “a majority of our outstanding voting securities,” as defined in the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (i) 67.0% or more of such company’s stock present at a meeting if more than 50.0% of the outstanding stock of such company is present and represented by proxy or (ii) more than 50.0% of the outstanding stock of such company.

 

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We do not intend to acquire securities issued by any investment company (including Section 3(c)(1) and Section 3(c)(7) funds for this purpose, and mutual funds, registered closed-end funds and BDCs) that exceed the limits imposed by the 1940 Act. Under these limits, except for registered money market funds, we generally cannot acquire more than 3% of the voting stock of the investment company’s total outstanding voting stock, invest more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the aggregate value of our total assets in the securities of more than one investment company. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses.

 

We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

 

We and our investment adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws and review these policies and procedures annually for their adequacy and the effectiveness of their implementation. We and our investment adviser have designated a chief compliance officer to be responsible for administering these policies and procedures. We expect to be periodically examined by the SEC for compliance with the 1940 Act.

 

Qualifying assets

 

A BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) below. Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70.0% of the company’s total assets. The principal categories of qualifying assets relevant to our business are the following:

 

  (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which:

 

  (a) is organized under the laws of, and has its principal place of business in, the United States;

 

  (b) is not an investment company (other than a small business investment company wholly owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and

 

  (c) satisfies either of the following:

 

  (i) does not have any class of securities listed on a national securities exchange;

 

  (ii) has a class of securities listed on a national securities exchange but has an aggregate market value of outstanding voting and non-voting common equity of less than $250.0 million;

 

  (iii) is controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible portfolio company;

 

  (iv) is a small and solvent company having total assets of not more than $4.0 million and capital and surplus of not less than $2.0 million; or

 

  (v) meets such other criteria as may established by the SEC. (2) Securities of any eligible portfolio company which we control.

 

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  (3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.

 

  (4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own at least 60.0% of the outstanding equity of the eligible portfolio company.

 

  (5) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of options, warrants or rights relating to such securities.

 

  (6) Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment.

 

The regulations defining qualifying assets may change over time. We may adjust our investment focus as needed to comply with and/or take advantage of any regulatory, legislative, administrative or judicial actions in this area.

 

Significant managerial assistance to portfolio companies

 

A BDC generally must offer to make available to the issuer of the securities in which it invests significant managerial assistance, except in circumstances where either (i) the BDC controls such issuer of securities or (ii) the BDC purchases such securities in conjunction with one or more other persons acting together and one of the other persons in the group makes available such managerial assistance. As a BDC we offer, and must provide upon request, managerial assistance to our portfolio companies. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees or those of its investment adviser, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. Pursuant to a separate Administration Agreement, our Saratoga Investment Advisors provides such managerial assistance on our behalf to portfolio companies that request this assistance, recognizing that our involvement with each investment will vary based on factors including the size of the company, the nature of our investment, the company’s overall stage of development and our relative position in the capital structure. We may receive fees for these services.

 

Temporary investments

 

As a BDC, pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70.0% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. Government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25.0% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the asset-diversification requirements in order to qualify as a RIC for U.S. federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our Investment Adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.

  

Indebtedness and senior securities

 

As a BDC, we are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of shares of stock, senior to our common stock, if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. On April 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into law on March 23, 2018, our board of directors, including a majority of our independent directors, approved of our becoming subject to a minimum asset coverage ratio of 150% under Sections 18(a)(1) and 18(a)(2) of the 1940 Act. The 150% asset coverage ratio became effective on April 16, 2019. See “Risk Factors – Effective April 16, 2019, our asset coverage requirement was reduced from 200% to 150%, which could increase the risk of investing in the Company.” We may also borrow amounts up to 5.0% of the value of our total assets for temporary or emergency purposes without regard to asset coverage.

 

The 1940 Act also limits the amount of warrants, options and rights to common stock that we may issue and the terms of such securities.

 

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Common stock

 

We are generally not able to issue and sell our common stock at a price below NAV per share. We may, however, sell our common stock, warrants, options or rights to acquire our common stock, at a price below the current NAV of the common stock if our board of directors determines that such sale is in our best interests and that of our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). We may also make rights offerings to our stockholders at prices per share less than the NAV per share, subject to applicable requirements of the 1940 Act.

 

Code of ethics

 

As a BDC, we and Saratoga Investment Advisors have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act, respectively, that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements. In addition, each code of ethics is available on the EDGAR database on the SEC’s website at www.sec.gov. Our code of ethics is also available on our corporate governance webpage at http://ir.saratogainvestmentcorp.com/corporate-governance.

 

Proxy voting policies and procedures

 

SEC registered investment advisers that have the authority to vote (client) proxies (which authority may be implied from a general grant of investment discretion) are required to adopt policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interests of its clients. Registered investment advisers also must maintain certain records on proxy voting. In most cases, we will invest in securities that do not generally entitle us to voting rights in our portfolio companies. When we do have voting rights, we will delegate the exercise of such rights to our Investment Adviser.

 

Saratoga Investment Advisors has particular proxy voting policies and procedures in place. In determining how to vote, officers of Saratoga Investment Advisors will consult with each other, taking into account our interests and the interests of our investors, as well as any potential conflicts of interest. Saratoga Investment Advisors will consult with legal counsel to identify potential conflicts of interest. Where a potential conflict of interest exists, Saratoga Investment Advisors may, if it so elects, resolve it by following the recommendation of a disinterested third party, by seeking the direction of our independent directors or, in extreme cases, by abstaining from voting. While Saratoga Investment Advisors may retain an outside service to provide voting recommendations and to assist in analyzing votes, it will not delegate its voting authority to any third party.

 

An officer of Saratoga Investment Advisors will keep a written record of how all such proxies are voted. It will retain records of (1) proxy voting policies and procedures, (2) all proxy statements received (or it may rely on proxy statements filed on the SEC’s EDGAR system in lieu thereof), (3) all votes cast, (4) investor requests for voting information, and (5) any specific documents prepared or received in connection with a decision on a proxy vote. If it uses an outside service, Saratoga Investment Advisors may rely on such service to maintain copies of proxy statements and records, so long as such service will provide a copy of such documents promptly upon request.

  

Saratoga Investment Advisors’ proxy voting policies are not exhaustive and are designed to be responsive to the wide range of issues that may be subject to a proxy vote. In general, Saratoga Investment Advisors will vote our proxies in accordance with these guidelines unless: (1) it has determined otherwise due to the specific and unusual facts and circumstances with respect to a particular vote, (2) the subject matter of the vote is not covered by these guidelines, (3) a material conflict of interest is present, or (4) it finds it necessary to vote contrary to its general guidelines to maximize stockholder value or our best interests.

 

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In reviewing proxy issues, Saratoga Investment Advisors generally will use the following guidelines:

 

Elections of Directors: In general, Saratoga Investment Advisors will vote in favor of the management-proposed slate of directors. If there is a proxy fight for seats on a portfolio company’s board of directors, or Saratoga Investment Advisors determines that there are other compelling reasons for withholding our vote, it will determine the appropriate vote on the matter. It may withhold votes for directors that fail to act on key issues, such as failure to: (1) implement proposals to declassify a board, (2) implement a majority vote requirement, (3) submit a rights plan to a stockholder vote or (4) act on tender offers where a majority of stockholders have tendered their shares. Finally, Saratoga Investment Advisors may withhold votes for directors of non-U.S. issuers where there is insufficient information about the nominees disclosed in the proxy statement.

 

Appointment of Auditors: We believe that a portfolio company remains in the best position to choose its independent auditors and Saratoga Investment Advisors will generally support management’s recommendation in this regard.

 

Changes in Capital Structure: Changes in a portfolio company’s organizational documents may be required by state or federal regulation. In general, Saratoga Investment Advisors will cast our votes in accordance with the management on such proposals. However, Saratoga Investment Advisors will consider carefully any proposal regarding a change in corporate structure that is not required by state or federal regulation.

 

Corporate Restructurings, Mergers and Acquisitions: We believe proxy votes dealing with corporate reorganizations are an extension of the investment decision. Accordingly, Saratoga Investment Advisors will analyze such proposals on a case-by-case basis and vote in accordance with its perception of our interests.

 

Proposals Affecting Stockholder Rights: We will generally vote in favor of proposals that give stockholders a greater voice in the affairs of a portfolio company and oppose any measure that seeks to limit such rights. However, when analyzing such proposals, Saratoga Investment Advisors will balance the financial impact of the proposal against any impairment of stockholder rights as well as of our investment in the portfolio company.

 

Corporate Governance: We recognize the importance of good corporate governance. Accordingly, Saratoga Investment Advisors will generally favor proposals that promote transparency and accountability within a portfolio company.

 

Anti-Takeover Measures: Saratoga Investment Advisors will evaluate, on a case-by-case basis, any proposals regarding anti- takeover measures to determine the likely effect on stockholder value dilution.

 

Share Splits: Saratoga Investment Advisors will generally vote with management on share split matters.

 

Limited Liability of Directors: Saratoga Investment Advisors will generally vote with management on matters that could adversely affect the limited liability of directors.

 

Social and Corporate Responsibility: Saratoga Investment Advisors will review proposals related to social, political and environmental issues to determine whether they may adversely affect stockholder value. It may abstain from voting on such proposals where they do not have a readily determinable financial impact on stockholder value.

 

Privacy principles

 

We are committed to protecting the privacy of our stockholders. The following explains the privacy policies of Saratoga

Investment Corp., Saratoga Investment Advisors and their affiliated companies.

 

We will safeguard, according to strict standards of security and confidentiality, all information we receive about our stockholders.

  

Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information of our stockholders may become available to us. The only information we collect from stockholders is the holder’s name, address, number of shares and social security number. This information is used only so that we can send annual reports and other information about us to the stockholder and send the stockholder proxy statements or other information required by law. We restrict access to non-public personal information about our stockholders to our Investment Adviser’s and Administrator’s employees with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our stockholders.

 

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We do not share this information with any non-affiliated third party except as described below:

 

  Authorized Employees of Saratoga Investment Advisors. It is our policy that only authorized employees of Saratoga Investment Advisors who need to know a stockholder’s personal information will have access to it.

 

  Service Providers. We may disclose your personal information to companies that provide services on our behalf, such as recordkeeping, processing a stockholder’s trades, and mailing stockholder information. These companies are required to protect our stockholders’ information and use it solely for the purpose for which they received it.

 

  Courts and Government Officials. If required by law, we may disclose a stockholder’s personal information in accordance with a court order or at the request of government regulators. Only that information required by law, subpoena, or court order will be disclosed.

 

Compliance with applicable laws

 

As a BDC, we are periodically examined by the SEC for compliance with the 1940 Act.

 

We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

 

We and Saratoga Investment Advisors are each required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the policies and procedures.

 

The New York Stock Exchange (“NYSE”) Corporate Governance Regulations

 

The NYSE has adopted corporate governance regulations that listed companies must comply with. We are in compliance with such corporate governance listing standards applicable to BDCs.

 

Co-investment

 

We may be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our board of directors who are not interested persons and, in some cases, prior approval by the SEC. Thus, based on current SEC interpretations, co-investment transactions involving a BDC like us and an entity that is advised by Saratoga Investment Advisors or an affiliated adviser generally could not be effected without SEC relief. The staff of the SEC has, however, granted no-action relief to third parties permitting purchases of a single class of privately-placed securities provided that the adviser negotiates no term other than price and certain other conditions are met. As a result, currently we only expect to co-invest on a concurrent basis with affiliates of Saratoga Investment Advisors when each party will own the same securities of the issuer and when no term is negotiated other than price. Any such investment would be made, subject to compliance with existing regulatory guidance, applicable regulations and our allocation procedures.

 

We may in the future submit an application for exemptive relief to the SEC to permit greater flexibility to negotiate the terms of co-investments because we believe that it will be advantageous for us to co-invest with affiliates of Saratoga Investment Advisors where such investment is consistent with the investment objective, investment positions, investment policies, investment strategies, investment restrictions, regulatory requirements and other pertinent factors applicable to us. However, there is no assurance that any application for exemptive relief, if made, would be granted by the SEC.

  

Small Business Investment Company Regulations

 

Our wholly owned subsidiaries, SBIC LP, SBIC II LP, and SBIC III LP, received an SBIC license from the SBA on March 28, 2012, August 14, 2019, and September 29, 2022, respectively.

 

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The SBIC licenses allows our SBIC Subsidiaries to obtain leverage by issuing SBA-guaranteed debentures, subject to the satisfaction of certain customary procedures. 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 at the time of issuance at a market-driven spread over U.S. Treasury Notes with 10-year maturities.

 

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 current SBA regulations, eligible small businesses include businesses (together with their affiliates) that have a tangible net worth not exceeding $24.0 million and have average annual net income after U.S federal income taxes not exceeding $8.0 million (average net income to be computed without benefit of any carryover loss) for the two most recent fiscal years. In addition, an SBIC must devote 25.0% of its investment activity to “smaller enterprises” as defined by the SBA. A smaller enterprise is a business (including its affiliates) that has a tangible net worth not exceeding $6.0 million and has average annual net income after U.S. federal income taxes not exceeding $2.0 million (average net income to be computed without benefit of any net carryover loss) for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility for designation as an eligible small business, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross revenue. 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.

 

The SBIC Subsidiaries 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 our SBIC Subsidiaries will receive SBA-guaranteed debenture funding, which is dependent upon each SBIC Subsidiary continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to each SBIC Subsidiary’s assets over our stockholders and debtholders in the event we liquidate such SBIC Subsidiary or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC Subsidiary upon an event of default.

 

We received exemptive relief from the SEC to permit it to exclude the senior securities of the SBIC Subsidiaries from the definition of senior securities in the asset coverage requirement under the 1940 Act. This allows us increased flexibility under the asset coverage requirement by permitting it to borrow up to $350.0 million more than it would otherwise be able to absent the receipt of this exemptive relief.

 

For two or more SBIC’s under common control, the maximum amount of outstanding SBA debentures cannot exceed $350.0 million with at least $175.0 million in combined regulatory capital. Our wholly owned SBIC Subsidiaries may borrow funds from the SBA against its respective regulatory capital (which generally approximates equity capital) that is paid in and is subject to customary regulatory requirements including but not limited to an examination by the SBA. The SBIC Subsidiaries have $237.0 million of committed capital on an aggregate basis. SBA regulations currently limit the amount of SBA-guaranteed debentures that an individual SBIC may issue to $150.0 million when it has at least $75.0 million in regulatory capital.

 

As of February 28, 2023, we have funded SBIC LP with an aggregate total of $75.0 million of equity capital and have $27.0 million of SBA guaranteed debentures outstanding. We have funded SBIC II LP with an aggregate total of $87.5 million of equity capital and have $175.0 million of SBA-guaranteed debentures outstanding and we have funded SBIC III LP with an aggregate total of $35.0 million of equity capital and have $0.0 million of SBA-guaranteed debentures outstanding.

 

Available Information

 

We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Securities Exchange of 1934, as amended (the “Exchange Act”). The SEC maintains an Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC at www.sec.gov.

 

Our Internet address is www.saratogainvestmentcorp.com. We make available free of charge on our Internet website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into this Annual Report, and you should not consider that information to be part of this Annual Report.

 

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ITEM 1A. RISK FACTORS

 

Investing in our securities involves a number of significant risks. In addition to other information contained in this Annual Report on Form 10-K, you should consider carefully the following information before making an investment in our securities. The risks set forth below are the principal risks with respect to the Company generally and with respect to BDCs, they may not be the only risks we face. This section nonetheless describes the principal risk factors associated with investment in the Company specifically, as well as those factors generally associated with investment in a company with investment objectives, investment policies, capital structure or trading markets similar to the Company’s. If any of the risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our NAV and the trading price of our securities could decline and you may lose all or part of your investment.

 

SUMMARY OF RISK FACTORS

 

The following is a summary of the principal risks that you should carefully consider before investing in our securities. These and other risk factors are described more fully in this “Item 1A. Risk Factors.”

 

Risks Related to Our Business and Structure 

 

Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.

 

  Inflation may adversely affect the business results of operations and financial condition of our portfolio companies, which may, in turn, impact the valuation of such portfolio companies.

 

  We are currently operating in a period of capital markets disruption and economic uncertainty.

 

  Economic recessions or downturns could impair the ability of our portfolio companies to repay loans and harm our operating results.

 

Risks Related to the Current Environment

 

  Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.

 

  Inflation may adversely affect the business results of operations and financial condition of our portfolio companies, which may, in turn, impact the valuation of such portfolio companies.

  

  We are currently operating in a period of capital markets disruption and economic uncertainty.

 

  Economic recessions or downturns could impair the ability of our portfolio companies to repay loans and harm our operating results.

 

Risks Related to Our Adviser and Its Affiliates

 

  We may be obligated to pay Saratoga Investment Advisors incentive fees even if we incur a net loss, or there is a decline in the value of our portfolio.

 

  The way in which the base management and incentive fees under the Management Agreement is determined may encourage Saratoga Investment Advisors to take actions that may not be in our best interests.

 

  Saratoga Investment Advisors’ liability is limited under the Management Agreement and we will indemnify Saratoga Investment Advisors against certain liabilities, which may lead it to act in a riskier manner on our behalf than it would when acting for its own account.

 

  Our ability to enter into transactions with our affiliates is restricted.

 

Risks Related to Our Investments

 

  A majority of our debt investments are not required to make principal payments until the maturity of such debt securities and are generally riskier than other types of loans.

 

  The lack of liquidity in our investments may adversely affect our business.

 

  Our investment in Saratoga CLO constitutes a leveraged investment in a portfolio of subordinated notes representing the lowest-rated securities issued by a pool of predominantly senior secured first lien term loans and is subject to additional risks and volatility. All losses in the pool of loans will be borne by our subordinated notes and only after the value of our subordinated notes is reduced to zero will the higher-rated notes issued by the pool bear any losses.

 

  Investments in equity securities involve a substantial degree of risk.

 

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Risks Related to Our Common Stock

 

  We may choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.

 

  Due to current market conditions, we may defer our dividends and choose to incur US federal excise tax in order preserve cash and maintain flexibility.

 

  The market price of our common stock may fluctuate significantly.

 

  There is a risk that you may not receive distributions or that our distributions may not grow over time.

 

Risks Related to Our Notes

 

  The Notes are unsecured and therefore are effectively subordinated to any existing and future secured indebtedness, including indebtedness under our Encina Credit Facility.

 

  An active trading market for the Public Notes may not develop or be sustained, which could limit the market price of the Public Notes or the ability to sell them.

 

  Public health threats may affect the market for the Public Notes, impact the businesses in which we invest and affect our business, operating results and financial condition.

 

RISKS RELATED TO OUR BUSINESS AND STRUCTURE

 

We employ leverage, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.

 

Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in us. We borrow from and issue senior debt securities to banks and other lenders that is secured by a lien on our assets. Holders of these senior securities have fixed dollar claims on our assets that are superior to the claims of the holders of our securities. Leverage is generally considered a speculative investment technique. Any increase in our income in excess of interest payable on our outstanding indebtedness would cause our net income to increase more than it would have had we not incurred leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not incurred leverage. Such a decline could negatively affect our ability to make common stock distributions or scheduled debt payments, including with respect to the Notes, as defined below. There can be no assurance that our leveraging strategy will be successful.

 

Our outstanding indebtedness imposes, and additional debt we may incur in the future will likely impose, financial and operating covenants that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC. A failure to add new debt facilities or issue additional debt securities or other evidences of indebtedness in lieu of or in addition to existing indebtedness could have a material adverse effect on our business, financial condition or results of operations.

 

As of February 28, 2023, there were $32.5 million outstanding borrowings under the Encina Credit Facility. As of February 28, 2023, we had issued $202.0 million in SBA-guaranteed debentures and our $12.0 million principal amount of 7.00% fixed-rate notes due 2025 (the “7.00% 2025 Notes”), our $5.0 million principal amount of 7.75% fixed-rate notes due in 2025 (the “7.75% 2025 Notes”), our $175.0 million principal amount of 4.375% fixed-rate notes due in 2026 (the “4.375% 2026 Notes”), our $75.0 million principal amount of 4.35% fixed-rate notes due in 2027 (the “4.35% 2027 Notes”), our $105.5 million principal amount of 6.00% fixed-rate notes due in 2027 (the “6.00% 2027 Notes”), our $15.0 million principal amount of 6.25% fixed-rate notes due in 2027 (the “6.25% 2027 Notes”) our $46.0 million principal amount of 8.00% fixed-rate notes due 2027 (the “8.00% 2027 Notes”), and our $60.375 million principal amount of 8.125% fixed-rate notes due 2027 (the “8.125% 2027 Notes” and together with the 6.00% 2027 Notes and the 8.00% 2027 Notes, the “Public Notes”). Together, the 7.00% 2025 Notes, the 7.75% 2025 Notes, the 4.35% 2027 Notes, the 6.00% 2027 Notes, the 6.25% 2027 Notes, the 8.00% 2027 Notes, and the 8.125% 2027 Notes are referred to as the “Notes”. We may incur additional indebtedness in the future, including, but not limited to, borrowings under the Encina Credit Facility or the issuance of additional debt securities in one or more public or private offerings, although there can be no assurance that we will be successful in doing so. Our ability to service our debt depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. The amount of leverage that we employ at any particular time will depend on our management’s and our board of directors’ assessment of market and other factors at the time of any proposed borrowing.

 

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As a BDC, we are generally permitted to issue senior securities only in amounts such that our asset coverage ratio equals at least 150% of total assets to total borrowings and other senior securities, which include all of our borrowings (other than the senior securities of SBIC I LP’s, SBIC II LP’s and SBIC III LP’s under the terms of our SEC exemptive relief) and any preferred stock we may issue in the future. If this ratio declines below 150%, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions to our stockholders.

 

The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing in the table below.

 

Assumed Return on Our Portfolio

(net of expenses)

 

Assumed Return on Portfolio (Net of Expenses)  -10.0%  -5.0%   0%   5%   10% 
Corresponding Return to Common Stockholder (1)  -37%   -23%   -9%   5%   19% 

 

 

(1) Assumes $977.2 million in average total assets, $619.50 million in average debt outstanding, $351.4 million in average net assets and an average interest rate of 5.1%. Actual interest payments may be different. The various return scenarios above exclude borrowing costs, which are then separately deducted from the net return to common stockholders calculated base on average debt outstanding and average interest rate.

 

Substantially all of SIF II’s and each SBIC Subsidiary’s assets are subject to security interests under our Encina Credit Facility or claims of the SBA with respect to SBA-guaranteed debentures we may issue and if we default on our obligations thereunder, we may suffer adverse consequences, including the foreclosure on our assets.

 

Substantially all of SIF II’s and each SBIC Subsidiary’s assets are pledged as collateral under the Encina Credit Facility or are subject to a superior claim over the holders of our common stock or the Notes by the SBA pursuant to the SBA-guaranteed debentures. If we default on our obligations under the Encina Credit Facility or the SBA-guaranteed debentures, Encina Lender Finance, LLC and/or the SBA may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests or superior claim. In such event, we may be forced to sell our investments to raise funds to repay our outstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices we would not consider advantageous. Moreover, such deleveraging of our company could significantly impair our ability to effectively operate our business in the manner in which we have historically operated.

 

In addition, if Encina Lender Finance, LLC the lender under the Encina Credit Facility exercises its right to sell the assets pledged under the Encina Credit Facility, such sales may be completed at distressed sale prices, thereby diminishing or potentially eliminating the amount of cash available to us after repayment of the amounts outstanding under the Encina Credit Facility.

 

We are exposed to risks associated with changes in interest rates including potential effects on our cost of capital and net investment income.

 

General interest rate fluctuations and changes in credit spreads on floating rate loans may have a substantial negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on our rate of return on invested capital. In addition, in response to market indicators showing a rise in inflation, since March 2022, the Federal Reserve has been rapidly increasing interest rates and has indicated that it would consider additional rate hikes in response to ongoing inflation concerns. An increase in interest rates would make it more expensive to use debt to finance our investments. Decreases in credit spreads on debt that pays a floating rate of return would have an impact on the income generation of our floating rate assets. Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed rate securities that have longer maturities. Although we have no policy governing the maturities of our investments, under current market conditions we expect that we will invest in a portfolio of debt generally having maturities of up to ten years. This means that we will be subject to greater risk (other things being equal) than an entity investing solely in shorter-term securities.

 

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Because we may borrow to fund our investments, a portion of our net investment income may be dependent upon the difference between the interest rate at which we borrow funds and the interest rate at which we invest these funds. A portion of our investments will have fixed interest rates, while a portion of our borrowings will likely have floating interest rates. As a result, a significant change in market interest rates could have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which would reduce our net investment income if there is not a corresponding increase in interest income generated by our investment portfolio. Further, rising interest rates could also adversely affect our performance if we hold investments with floating interest rates, subject to specified minimum (or “floor”) interest rates, while at the same time engaging in borrowings subject to floating interest rates not subject to such minimums. In such a scenario, rising interest rates may temporarily increase our interest expense, even though our interest income from investments is not increasing in a corresponding manner if market rates remain lower than the existing floor rate. If general interest rates rise, there is also a risk that the portfolio companies in which we hold floating rate securities will be unable to pay escalating interest amounts, which could result in a default under their loan documents with us. Rising interest rates could also cause portfolio companies to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults. In addition, rising interest rates may increase pressure on us to provide fixed rate loans to our portfolio companies, which could adversely affect our net investment income, as increases in our cost of borrowed funds would not be accompanied by increased interest income from such fixed-rate investments.

 

We may hedge against such interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts, subject to applicable legal requirements, including without limitation, all necessary registrations (or exemptions from registration) with the Commodity Futures Trading Commission. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged borrowings. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.

 

The interest rates of our loans to our portfolio companies, any LIBOR-linked securities, and other financial obligations that extended beyond 2021 might be subject to change based on recent regulatory changes, including the decommissioning of LIBOR.

 

The London Interbank Offered Rate (“LIBOR”) is an index rate that historically has been widely used in lending transactions and remains a common reference rate for setting the floating interest rate on private loans. LIBOR typically has been the reference rate used in floating-rate loans extended to our portfolio companies and, to some degree, is expected to continue to be used as a reference rate until such time that private markets have fully transitioned to using the Secured Overnight Financing Rate (“SOFR”), or other alternative reference rates recommended by applicable market regulators. Uncertainty relating to the LIBOR calculation process, the valuation of LIBOR alternatives, and other economic consequences from the phasing out of LIBOR may adversely affect our results of operations, financial condition and liquidity.

 

On March 5, 2021, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the ICE Benchmark Administration (the entity regulated by the FCA that is responsible for calculating LIBOR) had notified the FCA of its intent, among other things, to cease providing overnight, 1, 3, 6 and 12 months USD LIBOR tenors after June 30, 2023 and all other tenors after December 31, 2021. On November 16, 2021, the FCA issued a statement confirming that starting January 1, 2022, entities supervised by the FCA will be prohibited from using LIBORs, including USD LIBOR, that will be discontinued as of December 31, 2021 as well as, except in very limited circumstances, those tenors of USD LIBOR that will be discontinued or declared non-representative after June 30, 2023. While LIBOR will cease to exist or be declared non-representative, there continues to be uncertainty regarding the nature of potential changes to specific USD LIBOR tenors, the development and acceptance of alternative reference rates and other reforms.

 

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Central banks and regulators in a number of major jurisdictions (for example, United States, United Kingdom, European Union, Switzerland and Japan) have convened working groups to find, and implement the transition to, suitable replacements for LIBORs and other interbank offered rates (“IBORs”). To identify a successor rate for USD LIBOR, the Alternative Reference Rates Committee (“ARRC”), U.S.-based group convened by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York, was formed. The ARRC has identified SOFR as its preferred alternative rate for LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. On July 29, 2021, the ARRC formally recommended SOFR as its preferred alternative replacement rate for LIBOR. On July 29, 2021, the ARRC also recommended a forward-looking term rate based on SOFR published by CME Group. Although SOFR appears to be the preferred replacement rate for U.S. dollar LIBOR, at this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or other reforms to LIBOR that may be enacted in the United States, United Kingdom or elsewhere. Alternative reference rates that may replace LIBOR, including SOFR for USD transactions, may not yield the same or similar economic results as LIBOR over the lives of such transactions. There can be no guarantee that SOFR will become the dominant alternative to USD LIBOR or that SOFR will be widely used and other alternatives may or may not be developed and adopted with additional consequences.

 

New York and several other states have passed laws intended to apply to U.S. dollar LIBOR-based contracts, securities, and instruments governed by those states’ laws. These laws established fallbacks for LIBOR when there is no or insufficient fallback rates in these contracts. The federal Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law on March 15, 2022. The federal legislation provides a statutory fallback mechanism on a nation-wide basis to replace U.S. dollar LIBOR with a benchmark rate, selected by the Federal Reserve Board and based on SOFR, for certain contracts that reference U.S. dollar LIBOR and contain no or insufficient fallback provisions. The New York and other state laws were superseded by the LIBOR Act. On December 16, 2022, the Federal Reserve Board adopted a final rule implementing certain provisions of the LIBOR Act (“Regulation ZZ”). Regulation ZZ specifies that on the LIBOR replacement date, which is the first London banking day after June 30, 2023, the Federal Reserve Board-selected benchmark replacement, based on SOFR and including any tenor spread adjustment as provided by Regulation ZZ, will replace references to overnight, 1, 3, 6, and 12-month LIBOR in certain contracts that do not mature before the LIBOR replacement date and that do not contain adequate fallback language. The LIBOR Act Regulation ZZ could apply to certain our investments that reference LIBOR to the extent that they do not have fallback provisions or adequate fallback provisions. 

 

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 value of and/or transferability of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us, valuation measurements used by us that include LIBOR as an input, our operational processes or our overall financial condition or results of operations. For instance, if the LIBOR reference rate of our LIBOR-linked securities, loans, and other financial obligations is higher than an alternative reference rate, such as SOFR, on our alternative reference rate-linked portfolio investments, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing liabilities may be compressed, reducing our net interest income and potentially adversely affecting our operating results. In addition, while the majority of our LIBOR-linked loans contemplate that LIBOR may cease to exist and allow for amendment to a new alternative reference rate without the approval of 100% of the lenders, if LIBOR ceases to exist, we could be required, in such situations, to negotiate modifications to credit agreements governing such instruments, in order to replace LIBOR with such alternative reference rate and to incorporate any conforming changes to applicable credit spreads or margins. Following the replacement of LIBOR, some or all of these credit agreements may bear interest at a lower interest rate, which could have an adverse impact on the value and liquidity of our investment in these portfolio companies and, as a result, on our results of operations. Such adverse impacts and the uncertainty of the transition could result in disputes and litigation with counterparties and borrowers regarding the implementation of alternative reference rates.

 

Uncertainty about U.S. Presidential Administration initiatives could negatively impact our business, financial condition and results of operations.

 

The U.S. government has recently called for significant changes to U.S. trade, healthcare, immigration, foreign and government regulatory policy. In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent events have created a climate of heightened uncertainty and introduced new and difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the extent the U.S. Congress or the current administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation and other areas. Although we cannot predict the impact, if any, of these changes to our business, they could adversely affect our business, financial condition, operating results and cash flows. Until we know what policy changes are made and how those changes impact our business and the business of our competitors over the long term, we will not know if, overall, we will benefit from them or be negatively affected by them.

 

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There are significant potential conflicts of interest which could adversely impact our investment returns.

 

Our executive officers and directors, and the members of our Investment Adviser, serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, Christian L. Oberbeck, our chief executive officer and managing member of our Investment Adviser, is the managing partner of Saratoga Partners, a middle-market private equity investment firm. In addition, the principals of our Investment Adviser may manage other funds which may from time to time have overlapping investment objectives with those of us and accordingly invest in, whether principally or secondarily, asset classes similar to those targeted by us. If this should occur, the principals of our Investment Adviser will face conflicts of interest in the allocation of investment opportunities to us and such other funds. Although our investment professionals will endeavor to allocate investment opportunities in a fair and equitable manner, we and our common stockholders could be adversely affected in the event investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and Investment Adviser, and the members of our Investment Adviser.

 

Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business.

 

We are subject to regulation at the local, state and federal level. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect. For example, the current U.S. presidential administration could support an enhanced regulatory agenda that imposes greater costs on all sectors and on financial services companies in particular. In addition, any change to the SBA’s current debenture program could have a significant impact on our ability to obtain low-cost leverage and, therefore, our competitive advantage over other funds.

 

Legal, tax and regulatory changes could occur that may adversely affect us. For example, from time to time the market for private equity transactions has been (and is currently being) adversely affected by a decrease in the availability of senior and subordinated financings for transactions, in part in response to credit market disruptions and/or regulatory pressures on providers of financing to reduce or eliminate their exposure to the risks involved in such transactions.

 

Additionally, any changes to the laws and regulations governing our operations related to permitted investments may cause us to alter our investment strategy in order to meet our investment objectives. Such changes could result in material differences to the strategies and plans set forth in this Annual Report and may shift our investment focus from the areas of expertise of our Investment Adviser to other types of investments in which our Investment Adviser may have little or no expertise or experience. Any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.

 

Legislative or other actions relating to taxes could have a negative effect on the Company.

 

Legislative or other actions relating to taxes could have a negative effect on the Company and its investors. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. We cannot predict with certainty how any changes in the tax laws might affect the Company, its investments or its investors. New legislation and any U.S. Treasury regulations, administrative interpretations or court decisions interpreting such legislation could significantly and negatively affect the Company’s ability to qualify for tax treatment as a RIC or the U.S. federal income tax consequences to the Company and its investors of such qualification or could have other adverse consequences. You are urged to consult with your tax advisor with respect to the impact of the status of any legislative, regulatory or administrative developments and proposals and their potential effect on your investment in our securities.

 

There is uncertainty surrounding potential legal, regulatory and policy changes by the current presidential administration and Congress in the United States that may directly affect financial institutions and the global economy.

 

Following the November 2022 elections in the United States, the Democratic Party controls the Presidency and the Senate, with the Republican Party controlling the House of Representatives. Despite political tensions and uncertainty in a divided legislature, changes in federal policy, including tax policies, and at regulatory agencies are expected to occur over time through policy and personnel changes, which may lead to changes involving the level of oversight and focus on the financial services industry or the tax rates paid by corporate entities. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain. Uncertainty surrounding future changes may adversely affect our operating environment and therefore our business, financial condition, results of operations and growth prospects.

 

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Changes to United States tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, harm us.

 

There has been ongoing discussion and commentary regarding potential significant changes to United States trade policies, treaties and tariffs. The current U.S. presidential administration, along with Congress, has created significant uncertainty about the future relationship between the United States and other countries with respect to the trade policies, treaties and tariffs. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of these factors could depress economic activity and restrict our portfolio companies’ access to suppliers or customers and have a material adverse effect on their business, financial condition and results of operations, which in turn would negatively impact us.

 

We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.

 

Our business is dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:

 

  sudden electrical or telecommunications outages;

 

  natural disasters such as earthquakes, tornadoes and hurricanes;

 

  disease pandemics or other serious public health events, such as the ongoing COVID-19 pandemic;

 

  events arising from local or larger scale political or social matters, including terrorist acts;

 

  acts of war; and

 

  cyber-attacks.

 

These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders.

 

Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited.

 

In 2020, the SEC adopted Rule 18f-4 under the 1940 Act, which relates to the use of derivatives and other transactions that create future payment or delivery obligations by BDCs (and other funds that are registered investment companies). Under Rule 18f-4, for which compliance was required beginning in August 2022, BDCs that use derivatives are subject to a value-at-risk (“VaR”) leverage limit, certain derivatives risk management program and testing requirements and requirements related to board reporting. These requirements apply unless the BDC qualifies as a “limited derivatives user,” as defined in Rule 18f-4. A BDC that enters into reverse repurchase agreements or similar financing transactions could either (i) comply with the asset coverage requirements of Section 18, as modified by Section 61, of the 1940 Act when engaging in reverse repurchase agreements or (ii) choose to treat such agreements as derivatives transactions under Rule 18f-4. In addition, under Rule 18f-4, a BDC may enter into an unfunded commitment agreement that is not a derivatives transaction, such as an agreement to provide financing to a portfolio company, if the BDC has a reasonable belief, at the time it enters into such an agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all of its unfunded commitment agreements, in each case as it becomes due. If the BDC cannot meet this requirement, it is required to treat the unfunded commitment as a derivatives transaction subject to the aforementioned requirements of Rule 18f-4. Collectively, these requirements may limit our ability to use derivatives and/or enter into certain other financial contracts.

 

Internal and external cyber threats, as well as other disasters, could impair our ability to conduct business effectively.

 

The occurrence of a disaster, such as a cyber-attack against us or against a third-party that has access to our data or networks, a natural catastrophe, an industrial accident, failure of our disaster recovery systems, or consequential employee error, could have an adverse effect on our ability to communicate or conduct business, negatively impacting our operations and financial condition. This adverse effect can become particularly acute if those events affect our electronic data processing, transmission, storage, and retrieval systems, or impact the availability, integrity, or confidentiality of our data.

 

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Saratoga Investment Advisors and third-party service providers with which we do business depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer systems, networks, and data, like those of other companies, could be subject to cyber-attacks and unauthorized access, use, alteration, or destruction, such as from physical and electronic break-ins or unauthorized tampering, malware and computer virus attacks, unauthorized access, or system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary, and other information processed, stored in, and transmitted through our computer systems and networks. Such an attack could cause interruptions or malfunctions in our operations, which could result in financial losses, litigation, regulatory penalties, client dissatisfaction or loss, reputational damage, and increased costs associated with mitigation of damages and remediation. If unauthorized parties gain access to such information and technology systems, they may be able to steal, publish, delete or modify private and sensitive information, including nonpublic personal information related to stockholders (and their beneficial owners) and material nonpublic information. The systems we have implemented to manage risks relating to these types of events could prove to be inadequate and, if compromised, could become inoperable for extended periods of time, cease to function properly or fail to adequately secure private information. Breaches such as those involving covertly introduced malware, impersonation of authorized users and industrial or other espionage may not be identified even with sophisticated prevention and detection systems, potentially resulting in further harm and preventing them from being addressed appropriately. The failure of these systems or of disaster recovery plans for any reason could cause significant interruptions in our and our investment advisor’s operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to stockholders, material nonpublic information and other sensitive information in our possession.

 

Third parties with which we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information, as well as client, counterparty, employee, and borrower information. Cybersecurity failures or breaches by Saratoga Investment Advisors and other service providers (including, but not limited to, accountants, custodians, transfer agents and administrators), and the issuers of securities in which we invest, also have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with our ability to calculate its NAV, impediments to trading, the inability of our shareholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputation damages, reimbursement of other compensation costs, or additional compliance costs. Our disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure, or destruction of data, or other cybersecurity incidents that affects our data, resulting in increased costs and other consequences as described above.

 

In addition, cybersecurity has become a top priority for regulators around the world. Privacy and information security laws and regulation changes, and compliance with those changes, may result in cost increases due to system changes and the development of new administrative processes. In addition, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. We currently maintain insurance coverage relating to cybersecurity risks; however, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are not fully insured.

 

We and our service providers may be impacted by operating restrictions in response to COVID-19, which may include requiring employees to work from remote locations. Policies of extended periods of remote working, whether by us or our service providers, could strain technology resources, introduce operational risks and otherwise heighten the risks described above. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit weaknesses in a remote work environment. Accordingly, the risks described above are heightened under current conditions, which may continue for an unknown duration.

 

Cybersecurity risks and cyber incidents may adversely affect our business or the business of our portfolio companies by causing a disruption to our operations or the operations of our portfolio companies, a compromise or corruption of our confidential information or the confidential information of our portfolio companies and/or damage to our business relationships or the business relationships of our portfolio companies, all of which could negatively impact the business, financial condition and operating results of us or our portfolio companies.

 

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of the information resources of us or our portfolio companies. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems or those of our portfolio companies or third-party vendors for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. Despite careful security and controls design, the information technology system of our portfolio companies and our third-party vendors, may be subject to security breaches and cyber-attacks the result of which could include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to business relationships. As our portfolio companies’ and our third party vendor’s reliance on technology has increased, so have the risks posed to our information systems, both internal and those provided by third-party service providers, and the information systems of our portfolio companies and third-party vendors. We have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber-incident, do not guarantee that a cyber-incident will not occur and/or that our financial results, operations or confidential information will not be negatively impacted by such an incident. Further, the remote working conditions resulting from COVID-19 pandemic have heightened our and our portfolio companies’ vulnerability to a cybersecurity risk or incident.

 

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Regulations governing our operation as a BDC will affect our ability to raise additional capital.

 

Our business requires a substantial amount of additional capital. We may acquire additional capital from the issuance of senior securities or other indebtedness or the issuance of additional shares of our common stock. However, we may not be able to raise additional capital in the future on favorable terms or at all. We may issue debt securities or preferred securities, which we refer to collectively as “senior securities,” and we may borrow money from banks or other financial institutions, up to the maximum amount permitted by the 1940 Act.

 

We are not generally able to issue and sell our common stock at a price below NAV per share. We may, however, sell our common stock, or issue warrants, options or rights to acquire our common stock, at a price below the current NAV of the common stock if our board of directors determines that such sale is in our best interests and the best interests of our stockholders, and the holders of a majority of our outstanding voting securities have approved such issuances within the prior year. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any commission or discount). If our common stock trades at a discount to NAV, this restriction could adversely affect our ability to raise capital. We do not currently have stockholder approval of issuances below NAV.

 

Effective April 16, 2019, our asset coverage requirement was reduced from 200% to 150%, which could increase the risk of investing in the Company.

 

The 1940 Act generally prohibits BDCs from incurring indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, on March 23, 2018, the Small Business Credit Availability Act modified the 1940 Act by allowing a BDC to increase the maximum amount of leverage it may incur from an asset coverage ratio of 200% to an asset coverage ratio of 150%, if certain requirements are met. Under the 1940 Act, we were allowed to increase our leverage capacity once the majority of our independent directors approved an increase in our leverage capacity, with such approval becoming effective after one year. On April 16, 2018, our board of directors, including a majority of our independent directors, approved of our becoming subject to a minimum asset coverage ratio of 150% under Sections 18(a)(1) and 18(a)(2) of the 1940 Act. The 150% asset coverage ratio became effective on April 16, 2019. We are required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage.

 

We are generally permitted to incur indebtedness or issue senior securities in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 150% after each issuance of senior securities. Compliance with these requirements may unfavorably limit our investment opportunities and reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can lend. As a BDC, therefore, we may need to issue equity more frequently than our privately-owned competitors, which may lead to greater stockholder dilution. With respect to stock that is a senior security, we must make provisions to prohibit any dividend distribution to our stockholders or the repurchase of certain of our securities, unless we meet the applicable asset coverage ratios at the time of the dividend distribution or repurchase. If the value of our assets declines, we may be unable to satisfy the asset coverage test. If that happens, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales may be disadvantageous in order to make dividend distributions or repurchase certain of our securities.

 

Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, our stockholders will experience increased risks of investing in our securities. If the value of our assets increases, then leveraging would cause the NAV attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause NAV to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. Increased leverage may also cause a downgrade of our credit rating. Leverage is generally considered a speculative investment technique. See “Risk Factors—Risks Related to Our Business and Structure—We employ leverage, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.”

 

The agreement governing our Encina Credit Facility contains various covenants that, among other things, limits our discretion in operating our business and provides for certain minimum financial covenants.

 

The agreement governing the Encina Credit Facility contains customary default provisions such as the termination or departure of certain “key persons” of Saratoga Investment Advisors, a material adverse change in our business and the failure to maintain certain minimum loan quality and performance standards. An event of default under the Encina Credit Facility would result, among other things, in termination of the availability of further funds under the Encina Credit Facility and an accelerated maturity date for all amounts outstanding under the Encina Credit Facility, which would likely disrupt our business and, potentially, the portfolio companies whose loans we financed through the Encina Credit Facility. This could reduce our revenues and, by delaying any cash payment allowed to us under the Encina Credit Facility until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and maintain our status as a RIC.

 

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Each loan origination under the facility is subject to the satisfaction of certain conditions. We cannot assure you that we will be able to borrow funds under the Encina Credit Facility at any particular time or at all.

 

We will be subject to U.S. federal income tax at corporate rates if we fail to qualify as a RIC.

 

We intend to maintain our qualification as a RIC under the Code. As a RIC, we are not subject to U.S. federal income tax on our income (including realized gains) that is timely distributed to our stockholders, provided that we satisfy certain source-of-income, annual distribution and asset–diversification requirements.

 

The source-of-income requirement is satisfied if we derive at least 90% of our annual gross income from interest, dividends, payments with respect to certain securities loans, gains from the sale or other disposition of securities or options thereon or foreign currencies, or other income derived with respect to our business of investing in such securities or currencies, and net income from interests in “qualified publicly traded partnerships,” as defined in the Code.

 

The annual distribution requirement generally is satisfied if we timely distribute to our stockholders on an annual basis an amount equal to at least 90% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. We are subject to certain asset coverage ratio requirements under the 1940 Act and covenants under our borrowing agreements that could, under certain circumstances, restrict us from making the required distributions. In such case, if we are unable to obtain cash from other sources or are prohibited from making distributions, we may be subject to U.S. federal income tax at corporate rates.

 

The asset-diversification requirements will be satisfied if we diversify our holdings so that at the end of each quarter of the taxable year: (i) at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other regulated investment companies, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and (ii) no more than 25% of the value of our assets is invested in (a) the securities, other than U.S. government securities or securities of other regulated investment companies, of one issuer, (b) the securities, other than securities of other RICs, of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or (c) the securities of certain publicly traded partnerships.

 

Failure to meet these tests may result in our having to (i) dispose of certain investments quickly or (ii) raise additional capital to prevent the loss of our RIC qualification. Because most of our investments will be in private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we raise additional capital to satisfy the asset- diversification requirements, it could take us time to invest such capital. During this period, we will invest the additional capital in temporary investments, such as cash and cash equivalents, which we expect will earn yields substantially lower than the interest income that we anticipate receiving in respect of investments in leveraged loans and mezzanine debt.

 

If we fail to qualify as a RIC for any reason, all of our taxable income will be subject to U.S. federal income tax at regular corporate rates. The resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution to our common stockholders or payment of our outstanding indebtedness including the Notes. Such a failure would have a material adverse effect on our results of operations and financial condition.

 

Because we intend to distribute between 90% and 100% of our income to our stockholders in connection with our election to be treated as a RIC, we will continue to need additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired.

 

In order to qualify for the tax benefits available to RICs and to minimize U.S. federal income taxes at corporate rates, we intend to distribute to our stockholders between 90% and 100% of our annual taxable income and capital gains, except that we may retain certain net capital gains for investment and treat such amounts as deemed distributions to our stockholders. If we elect to treat any amounts as deemed distributions, we must pay U.S. federal income taxes at the corporate rate on such deemed distributions on behalf of our stockholders. As a result of these requirements, we will likely need to raise capital from other sources to grow our business. 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 includes all of our borrowings and any outstanding preferred stock, of at least 150% as of April 16, 2019; These requirements limit the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, these limitations may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so.

 

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While we expect to be able to borrow and to issue additional debt and equity securities, we cannot assure you that debt and equity financing will be available to us on favorable terms, or at all. Also, as a BDC, we generally are not permitted to issue equity securities priced below NAV without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new investment activities, and our NAV and share price could decline.

 

We may have difficulty paying our required distributions if we recognize income before or without receiving cash in respect of such income.

 

For U.S. federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, we may on occasion hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK or, in certain cases, increasing interest rates or issued with warrants) and we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. In addition, we may be required to accrue for U.S. federal income tax purposes amounts attributable to our investment in Saratoga CLO, a collateralized loan obligation fund, that may differ from the distributions paid in respect of our investment in the subordinated notes of such collateralized loan obligation fund because of the factors set forth above or because distributions on the subordinated notes are contractually required to be diverted for reinvestment or to pay down outstanding indebtedness.

 

Because original issue discount will be included in the Company’s “investment company taxable income” for the year of the accrual, we may be requested to make distributions to shareholders to satisfy the annual distribution requirement applicable to RICs, even where we have not received any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement necessary to maintain favorable tax treatment. If we are not able to obtain cash from other sources, and choose not to make a qualifying share distribution, we may become subject to U.S federal income tax at corporate rates. Additionally, because investments with a deferred payment feature may have the effect of deferring a portion of the borrower’s payment obligation until maturity of the debt investment, it may be difficult for us to identify and address developing problems with borrowers in terms of their ability to repay us.

 

We operate in a highly competitive market for investment opportunities.

 

A number of entities compete with us to make the types of investments that we make in private middle-market companies. We compete with other BDCs, public and private funds (including SBICs), commercial and investment banks, commercial financing companies, insurance companies, high-yield investors, hedge funds, and, to the extent they provide an alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than us. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments that could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. As a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we cannot assure you that we will be able to identify and make investments that meet our investment objective.

 

While we do not seek to compete primarily based on the interest rates we offer, we believe that some our competitors may make loans with interest rates that are comparable or lower than the rates we offer.

 

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We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss. As a result of operating in such a competitive environment, we may make investments that are on better terms to our portfolio companies than we originally anticipated, which may impact our return on these investments.

 

We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer.

 

We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. Although we seek to maintain a diversified portfolio in accordance with our business strategies, to the extent that we assume large positions in the securities of a small number of issuers, our NAV may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. Beyond our RIC asset-diversification requirements, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few portfolio companies.

 

Our financial condition and results of operations depend on our ability to manage future investments effectively.

 

Our ability to achieve our investment objective depends on our ability to acquire suitable investments and monitor and administer those investments, which depends, in turn, on Saratoga Investment Advisors’ ability to identify, invest in and monitor companies that meet our investment criteria.

 

Accomplishing this result on a cost-effective basis is largely a function of Saratoga Investment Advisors’ structuring of the investment process and its ability to provide competent, attentive and efficient service to us. Our executive officers and the officers and employees of Saratoga Investment Advisors have substantial responsibilities in connection with their roles at Saratoga Partners as well as responsibilities under the Management Agreement. They may also be called upon to provide managerial assistance to our portfolio companies. These demands on their time, which will increase as the number of investments grow, may distract them or slow the rate of investment. In order to grow, Saratoga Investment Advisors may need to hire, train, supervise and manage new employees. However, we cannot assure you that any such employees will contribute beneficially to the work of Saratoga Investment Advisors. Any failure to manage our future growth effectively could have a material adverse effect on our business and financial condition.

 

We may experience fluctuations in our quarterly and annual results.

 

We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the debt investments we make, the default rate on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, changes in our portfolio composition, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods. In addition, any of these factors could negatively impact our ability to achieve our investment objectives, which may cause the NAV of our common stock to decline.

 

Terrorist attacks, acts of war, or natural disasters may affect any market for our common stock, impact the businesses in which we invest and harm our business, operating results and financial condition.

 

Portfolio investments may be affected by force majeure events (i.e., events beyond the control of the party claiming that the event has occurred, including, without limitation, acts of God, fire, flood, earthquakes, war, terrorism and labor strikes). Some force majeure events may adversely affect the ability of a party (including a portfolio company or a counterparty to us or a portfolio company) to perform its obligations until it is able to remedy the force majeure event. In addition, the cost to a portfolio company of repairing or replacing damaged assets resulting from such force majeure event could be considerable. Additionally, a major governmental intervention into industry, including the nationalization of an industry or the assertion of control over one or more companies or its assets, could result in a loss to us, including if its investment in such issuer is cancelled, unwound or acquired (which could be without what we consider to be adequate compensation). To the extent we are exposed to investments in portfolio companies that as a group are exposed to such force majeure events, the risks and potential losses to us are enhanced.

 

The continued threat of global terrorism and the impact of military and other action will likely continue to cause volatility in the economies of certain countries, contribute to increased market volatility and economic uncertainties or deterioration in the United States and worldwide and various aspects thereof, including in prices of commodities. Our portfolio investments may involve significant strategic assets having a national or regional profile. The nature of these assets could expose them to a greater risk of being the subject of a terrorist attack than other assets or businesses. Acts of war could similarly lead to such volatility. For example, in response to the conflict between Russia and Ukraine, the United States and other countries have imposed sanctions or other restrictive actions against Russia. Any of the above factors, including sanctions, export controls, tariffs, trade wars and other governmental actions, could have a material adverse effect on our business, financial condition, cash flows, and results of operations, and could cause the market value of our common stock to decline.

 

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Substantially all of our portfolio investments are recorded at fair value as determined in good faith by our board of directors; such valuations are inherently uncertain and may be materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

 

Substantially all of our portfolio is, and we expect will continue to be, comprised of investments that are not publicly traded. The value of investments that are not publicly traded may not be readily determinable. We value these investments quarterly at fair value as determined in good faith by our board of directors. Saratoga Investment Advisors may utilize the services of an independent valuation firm to aid it in determining fair value of investments for which market quotations are not readily available. The types of factors that may be considered in valuing our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, market yield trend analysis, comparison to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private investments and private companies are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our NAV 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.

 

Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.

 

Our board of directors has the authority to modify or waive our current investment objective, operating policies and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, financial condition, and value of our common stock. However, the effects might be adverse, which could negatively impact our ability to pay dividends and cause you to lose all or part of your investment.

 

Any failure to comply with SBA regulations could have an adverse effect on our operations.

 

Our wholly owned subsidiaries, SBIC LP, SBIC II LP, and SBIC III LP, received an SBIC license from the SBA on March 28, 2012, August 14, 2019, and September 29, 2022, respectively.

 

The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBIC requirements may cause our SBIC subsidiaries to forego attractive investment opportunities that are not permitted under SBA regulations.

 

Further, SBA regulations require that an SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of an SBIC. If our SBIC Subsidiaries fail to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit its use of debentures, declare outstanding debentures immediately due and payable, and/or limit it from making new investments. In addition, the SBA can revoke or suspend a license for willful or repeated violation of, or willful or repeated failure to observe, any provision of the Small Business Investment Act of 1958 or any rule or regulation promulgated thereunder. These actions by the SBA would, in turn, negatively affect us because our SBIC Subsidiaries are our wholly owned subsidiaries. Any failure to comply with SBA regulations may hinder our ability to take advantage of our SBIC subsidiaries’ access to SBA-guaranteed debentures, which could have an adverse effect on our operations.

 

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RISKS RELATED TO THE CURRENT ENVIRONMENT

 

Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.

 

The current worldwide financial market situation, as well as various social and political tensions in the United States and around the world (including wars and other forms of conflict, terrorist acts, security operations and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes and global health epidemics), may contribute to increased market volatility, may have long-term effects on the U.S. and worldwide financial markets, and may cause economic uncertainties or deterioration in the United States and worldwide.

 

On January 31, 2020, the United Kingdom ended its membership in the European Union, referred to as “Brexit.” Following the termination of a transition period, the United Kingdom and the European Union entered into a trade and cooperation agreement to govern the future relationship between the parties, which was provisionally applied as of January 1, 2021 and entered into force on May 1, 2021 following ratification by the European Union. With respect to financial services, the agreement leaves decisions on equivalence and adequacy to be determined by each of the United Kingdom and the European Union unilaterally in due course. Such agreement is untested and could lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European and global markets for some time. In addition, on December 24, 2020, the European Union and United Kingdom governments signed a trade deal that became provisionally effective on January 1, 2021 and that now governs the relationship between the United Kingdom and the European Union (the “Trade Agreement”). The Trade Agreement implements significant regulation around trade, transport of goods and travel restrictions between the United Kingdom and the European Union.

 

Notwithstanding the foregoing, the longer term economic, legal, political and social implications of Brexit are unclear at this stage and are likely to continue to lead to ongoing political and economic uncertainty and periods of increased volatility in both the United Kingdom and in wider European markets for some time. In particular, Brexit could lead to calls for similar referendums in other European Union jurisdictions, which could cause increased economic volatility in the European and global markets. This mid- to long-term uncertainty could have adverse effects on the economy generally and on our ability to earn attractive returns. In particular, currency volatility could mean that our returns are adversely affected by market movements and could make it more difficult, or more expensive, for us to execute prudent currency hedging policies. Potential decline in the value of the British Pound and/or the Euro against other currencies, along with the potential further downgrading of the United Kingdom’s sovereign credit rating, could also have an impact on the performance of certain investments made in the United Kingdom or European Union.

 

We are currently operating in a period of capital markets disruptions and economic uncertainty. Such market conditions may materially and adversely affect debt and equity capital markets, which may have a negative impact on our business, financial condition and results of operations.

 

From time to time, capital markets may experience periods of disruption and instability. The U.S. capital markets have experienced extreme volatility and disruption following the global outbreak of COVID-19 that began in December 2019 and the conflict between Russia and Ukraine that began in late February 2022 (see “Terrorist attacks, acts of war, or natural disasters may affect any market for our common stock, impact the businesses in which we invest and harm our business, operating results and financial condition” for more information). Even after the COVID-19 pandemic subsides, the U.S. economy, as well as most other major economies, may continue to experience a recession, and we anticipate our businesses would be materially and adversely affected by a prolonged recession in the United States and other major markets. Disruptions in the capital markets have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. These types of events have adversely affected and could continue to adversely affect operating results for us and for our portfolio companies.

 

The economic conditions caused by the COVID-19 pandemic could have an adverse impact on the ability of lenders to originate loans, the volume and type of loans originated, the ability of borrowers to make payments and the volume and type of amendments and waivers granted to borrowers and remedial actions taken in the event of a borrower default, each of which could negatively impact the amount and quality of loans available for investment by the Company and returns to the Company, among other things. With respect to the U.S. credit markets (in particular for middle-market loans), the COVID-19 pandemic has resulted in, and until fully resolved is likely to continue to result in, the following among other things: (i) increased draws by borrowers on revolving lines of credit and other financing instruments; (ii) increased requests by borrowers for amendments and waivers of their credit agreements to avoid default, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans; and (iii) greater volatility and disruption of these markets including greater volatility in pricing and spreads and difficulty in valuing loans during periods of increased volatility, and liquidity issues.

 

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These and future market disruptions and/or illiquidity could have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could limit our investment originations and our ability to grow and could also have a material negative impact on our operating results and the fair values of our debt and equity investments. We may have to access, if available, alternative markets for debt and equity capital, and a severe disruption in the global financial markets, deterioration in credit and financing conditions or uncertainty regarding U.S. government spending and deficit levels or other global economic conditions could have a material adverse effect on our business, financial condition and results of operations.

 

While we intend to continue to source and invest in new loan transactions to U.S. middle-market companies, we cannot be certain that we will be able to do so successfully or consistently. A lack of suitable investment opportunities may impair our ability to make new investments, and may reduce our earnings and dividends as a result.

 

If economic conditions caused by the COVID-19 pandemic continue for an extended period of time, loan delinquencies, loan non-accruals, problem assets, and bankruptcies may increase. In addition, collateral for our loans may decline in value, which could cause loan losses to increase and the net worth and liquidity of loan guarantors could decline, impairing their ability to honor commitments to us. An increase in loan delinquencies and non-accruals or a decrease in loan collateral and guarantor net worth could result in increased costs and reduced income which would have a material adverse effect on our business, financial condition or results of operations. While economic activity is well improved from the beginning of the COVID-19 pandemic, we continue to observe supply chain interruptions, labor difficulties, commodity inflation and elements of economic and financial market instability both globally and in the United States. Additionally, continued travel restrictions may prolong the global economic downturn.

 

We cannot be certain as to the duration or magnitude of the economic impact of the COVID-19 pandemic on the markets in which we and our portfolio companies operate and corresponding declines in economic activity that may negatively impact the U.S. economy and the markets for the various types of goods and services provided by U.S. middle-market companies. Depending on the duration, magnitude and severity of these conditions and their related economic and market impacts, certain portfolio companies may suffer declines in earnings and could experience financial distress, which could cause them to default on their financial obligations to us and their other lenders.

 

We will also be negatively affected if our operations and effectiveness or the operations and effectiveness of a portfolio company (or any of the key personnel or service providers of the foregoing) is compromised or if necessary or beneficial systems and processes are disrupted.

 

Events outside of our control, such as the COVID-19 pandemic, could negatively affect our portfolio companies and our results of our operations and financial condition.

 

Periods of market volatility have occurred and could continue to occur in response to pandemics or other events outside of our control. These types of events have adversely affected—and could continue to adversely affect—operating results for us and for our portfolio companies. For example, the COVID-19 pandemic has led to, and for an unknown period of time will continue to lead to, disruptions in local, regional, national and global markets and the economies affected thereby, including the United States. With respect to loans to portfolio companies, the Company will be impacted if, among other things, (i) amendments and waivers are granted (or are required to be granted) to borrowers permitting deferral of loan payments or allowing for PIK interest payments, (ii) borrowers default on their loans, are unable to refinance their loans at maturity, or go out of business, or (iii) the value of loans held by the Company decreases as a result of such events and the uncertainty they cause. Portfolio companies may also be more likely to seek to draw on unfunded commitments we have made, and the risk of being unable to fund such commitments is heightened during such periods.

 

Depending on the duration and extent of the disruption to the business operations of our portfolio companies, we expect some portfolio companies, particularly those in vulnerable industries, to experience financial distress and possibly to default on their financial obligations to us and/or their other capital providers. In addition, if such portfolio companies are subjected to prolonged and severe financial distress, we expect some of them to substantially curtail their operations, defer capital expenditures, and lay off workers. These developments would be likely to permanently impair their businesses and result in a reduction in the value of our investments in them. Any potential impact to our results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the spread or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our and our portfolio companies’ operating results and financial condition.

 

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Inflation may adversely affect the business, results of operations and financial condition of our portfolio companies, which may, in turn, impact the valuation of such portfolio companies.

 

Certain of our portfolio companies may be impacted by inflation, which may, in turn, impact the valuation of such portfolio companies. If such portfolio companies are unable to pass any increases in their costs along to their customers, it could adversely affect their results and their ability to pay interest and principal on our loans, particularly if interest rates rise in response to inflation. In addition, any projected future decreases in our portfolio companies’ operating results due to inflation could adversely impact the fair value of those investments. Any decreases in the fair value of our investments could result in future unrealized losses and therefore reduce our net assets resulting from operations.

 

Further downgrades of the U.S. credit rating, automatic spending cuts, or another government shutdown could negatively impact our liquidity, financial condition and earnings.

 

U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit-rating downgrades and economic slowdowns, or a recession in the United States. Although U.S. lawmakers passed legislation to raise the federal debt ceiling on multiple occasions, including an increase in the federal debt ceiling in December 2021, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States. [The December 2021 legislation suspends the debt ceiling through 2023, unless Congress takes legislative action to further extend or defer it..]

 

The impact of this or any further downgrades to the U.S. government’s sovereign credit rating or its perceived creditworthiness could adversely affect the U.S. and global financial markets and economic conditions. Absent further quantitative easing by the Federal Reserve, these developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time. Continued adverse political and economic conditions could have a material adverse effect on our business, financial condition and results of operations.

 

Economic recessions or downturns could impair the ability of our portfolio companies to repay loans and harm our operating results.

 

Many of our portfolio companies are susceptible to economic slowdowns or recessions (including industry specific downturns) and may be unable to repay our debt investments during these periods. As a result of among other things, the global outbreak of COVID-19, elevated levels of inflation, and a rising interest rate environment, economic markets have been disrupted, and the prolonged economic impact is uncertain. In the past, instability in the global capital markets resulted in disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major domestic and international financial institutions. In particular, in past periods of instability, the financial services sector was negatively impacted by significant write-offs as the value of the assets held by financial firms declined, impairing their capital positions and abilities to lend and invest. In addition, continued uncertainty surrounding the negotiation of trade deals between Britain and the European Union following the United Kingdom’s exit from the European Union and uncertainty between the United States and other countries, including China, with respect to trade policies, treaties, and tariffs, among other factors, have caused disruption in the global markets. There can be no assurance that market conditions will not worsen in the future.

 

In an economic downturn, we may have non-performing assets or non-performing assets may increase, and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions may also decrease the value of any collateral securing some of our debt investments and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing our investments and harm our operating results.

 

The occurrence of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our investments, and our ongoing operations, costs and profitability. Any such unfavorable economic conditions, including rising interest rates, may also increase our funding costs, limit our access to capital markets or negatively impact our ability to obtain financing, particularly from the debt markets. In addition, any future financial market uncertainty could lead to financial market disruptions and could further impact our ability to obtain financing. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results and financial condition.

 

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RISKS RELATED TO OUR ADVISER AND ITS AFFILIATES

 

We may be obligated to pay Saratoga Investment Advisors incentive fees even if we incur a net loss, or there is a decline in the value of our portfolio.

 

Saratoga Investment Advisors is entitled to incentive fees for each fiscal quarter in an amount equal to a percentage of the excess of our investment income for that quarter (before deducting incentive compensation, but net of operating expenses and certain other items) above a threshold return for that quarter. Our pre-incentive fee net investment income, for incentive compensation purposes, excludes realized and unrealized capital gains or losses that we may incur in the fiscal quarter, even if such capital gains or losses result in a net gain or loss on our consolidated statements of operations for that quarter. Thus, we may be required to pay Saratoga Investment Advisors incentive fees for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter.

 

Under the terms of the Management Agreement, we may have to pay incentive fees to Saratoga Investment Advisors in connection with the sale of an investment that is sold at a price higher than the fair value of such investment on May 31, 2010, even if we incur a loss on the sale of such investment.

 

Incentive fees on capital gains paid to Saratoga Investment Advisors under the Management Agreement 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 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. Under the Management Agreement, 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 Saratoga Investment Advisors will be entitled to 20.0% of the incentive fee capital 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 will equal the fair value of such investments as of such date. See our Form 10-Q for the quarter ended May 31, 2010 that was filed with the SEC on July 15, 2010 for the fair value and other information related to our investments as of such date. As a result, we may be required to pay incentive fees to Saratoga Investment Advisors on the sale of an investment even if we incur a realized loss on such investment, so long as the investment is sold for an amount greater than its fair value as of May 31, 2010.

 

The way in which the base management and incentive fees under the Management Agreement is determined may encourage Saratoga Investment Advisors to take actions that may not be in our best interests.

 

The incentive fee payable by us to our Investment Adviser may create an incentive for it to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement, which could result in higher investment losses, particularly during cyclical economic downturns. The way in which the incentive fee payable to our Investment Adviser is determined, which is calculated separately in two components as a percentage of the income (subject to a hurdle rate) and as a percentage of the realized gain on invested capital, may encourage our Investment Adviser to use leverage to increase the return on our investments or otherwise manipulate our income so as to recognize income in quarters where the hurdle rate is exceeded.

 

Moreover, we pay Saratoga Investment Advisors a base management fee based on our total assets, including any investments made with borrowings, which may create an incentive for it to cause us to incur more leverage than is prudent, or not to repay our outstanding indebtedness when it may be advantageous for us to do so, in order to maximize its compensation. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our securities.

 

The incentive fee payable by us to our Investment Adviser also may create an incentive for our Investment Adviser to invest on our behalf in instruments that have a deferred interest feature. Under these investments, we would accrue the interest over the life of the investment but would not receive the cash income from the investment until the end of the investment’s term, if at all. Our net investment income used to calculate the income portion of our incentive fee, however, includes accrued interest. Thus, a portion of the incentive fee would be based on income that we have not yet received in cash and may never receive in cash if the portfolio company is unable to satisfy such interest payment obligation to us. Consequently, while we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a “claw back” right against our Investment Adviser per se, the amount of accrued income written off in any period will reduce the income in the period in which such write-off was taken and may thereby reduce such period’s incentive fee payment.

 

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In addition, Saratoga Investment Advisors receives a quarterly income incentive fee based, in part, on our pre-incentive fee net investment income, if any, for the immediately preceding calendar quarter. This income incentive fee is subject to a fixed quarterly hurdle rate before providing an income incentive fee return to Saratoga Investment Advisors. This fixed hurdle rate was determined when then current interest rates were relatively low on a historical basis. Thus, if interest rates rise, it would become easier for our investment income to exceed the hurdle rate and, as a result, more likely that Saratoga Investment Advisors will receive an income incentive fee than if interest rates on our investments remained constant or decreased. However, if we repurchase our outstanding debt securities, including the Notes, and such repurchase results in our recording a net gain or loss on the extinguishment of debt for financial reporting and tax purposes, such net gain or loss will not be included in our pre-incentive fee net investment income for purposes of determining the income incentive fee payable to our Investment Adviser under the Management Agreement. Moreover, our Investment Adviser receives the incentive fee based, in part, upon net capital gains realized on our investments. Unlike the portion of the incentive fee based on income, there is no performance threshold applicable to the portion of the incentive fee based on net capital gains. As a result, our Investment Adviser may have a tendency to invest more in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

 

Our board of directors will seek to ensure that Saratoga Investment Advisors is acting in our best interests and that any conflict of interest faced by Saratoga Investment Advisors in its capacity as our Investment Adviser does not negatively impact us.

 

The base management fee we pay to Saratoga Investment Advisors may induce it to influence our leverage, which may be contrary to our interest.

 

We pay Saratoga Investment Advisors a quarterly base management fee based on the value of our total assets (including any assets acquired with leverage). Accordingly, Saratoga Investment Advisors has an economic incentive to increase our leverage. Our board of directors monitors the conflicts presented by this compensation structure by approving the amount of leverage that we incur. If our leverage is increased, we will be exposed to increased risk of loss, bear the increase cost of issuing and servicing such senior indebtedness, and will be subject to any additional covenant restrictions imposed on us in an indenture or other instrument or by the applicable lender.

 

Saratoga Investment Advisors’ liability is limited under the Management Agreement and we will indemnify Saratoga Investment Advisors against certain liabilities, which may lead it to act in a riskier manner on our behalf than it would when acting for its own account.

 

Saratoga Investment Advisors has not assumed any responsibility to us other than to render the services described in the Management Agreement. Pursuant to the Management Agreement, Saratoga Investment Advisors and its officers and employees are not liable to us for their acts under the Management Agreement absent willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. We have agreed to indemnify, defend and protect Saratoga Investment Advisors and its officers and employees with respect to all damages, liabilities, costs and expenses resulting from acts of Saratoga Investment Advisors not arising out of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties under the Management Agreement. These protections may lead Saratoga Investment Advisors to act in a riskier manner when acting on our behalf than it would when acting for its own account.

 

Our ability to enter into transactions with our affiliates is restricted.

 

Because we have elected to be treated as a BDC, we are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5.0% or more of our outstanding voting securities is our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any securities (other than any security of which we are the issuer) from or to such affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the same portfolio company, without prior approval of our independent directors and, in some cases, the SEC. If a person acquires more than 25.0% of our voting securities, we are prohibited from buying or selling any security (other than any security of which we are the issuer) from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such person, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers, directors or Investment Adviser or their affiliates. As a result of these restrictions, we may be prohibited from buying or selling any security (other than any security of which we are the issuer) from or to any portfolio company of a private equity fund managed by our Investment Adviser without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.

 

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RISKS RELATED TO OUR INVESTMENTS

 

If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event our portfolio companies default on their indebtedness.

 

We make unsecured debt investments in portfolio companies. Unsecured debt investments are unsecured and junior to other indebtedness of the portfolio company. As a consequence, the holder of an unsecured debt investment may lack adequate protection in the event the portfolio company becomes distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event the portfolio company defaults on its indebtedness. In addition, unsecured debt investments of middle- market companies are often highly illiquid and in adverse market conditions may experience steep declines in valuation even if they are fully performing.

 

If we invest in the securities and other obligations of distressed or bankrupt companies, such investments may be subject to significant risks, including lack of income, extraordinary expenses, uncertainty with respect to satisfaction of debt, lower-than expected investment values or income potentials and resale restrictions.

 

We are authorized to invest in the securities and other obligations of distressed or bankrupt companies. At times, distressed debt obligations may not produce income and may require us to bear certain extraordinary expenses (including legal, accounting, valuation and transaction expenses) in order to protect and recover our investment. Therefore, to the extent we invest in distressed debt, our ability to achieve current income may be diminished which may affect our ability to make distributions on our common stock or make interest and principal payments of the Notes.

 

We also will be subject to significant uncertainty as to when and in what manner and for what value the distressed debt we invest in will eventually be satisfied (e.g., through a liquidation of the obligor’s assets, an exchange offer or plan of reorganization involving the distressed debt securities or a payment of some amount in satisfaction of the obligation). In addition, even if an exchange offer is made or plan of reorganization is adopted with respect to distressed debt held by us, there can be no assurance that the securities or other assets received by us in connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made.

 

Moreover, any securities received by us upon completion of an exchange offer or plan of reorganization may be restricted as to resale. As a result of our participation in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of distressed debt, we may be restricted from disposing of such securities if we are in possession of material non-public information relating to the issuer.

 

Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.

 

Certain loans that we make to portfolio companies will be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the company’s remaining assets, if any.

 

The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken with respect to the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.

 

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A majority of our debt investments are not required to make principal payments until the maturity of such debt securities and are generally riskier than other types of loans.

 

As of February 28, 2023, 77% of our debt portfolio consisted of “interest-only” loans, which are structured such that the borrower makes only interest payments throughout the life of the loan and makes a large, “balloon payment” at the end of the loan term. The ability of a borrower to make or refinance a balloon payment may be affected by a number of factors, including the financial condition of the borrower, prevailing economic conditions, interest rates, and collateral values. If the interest-only loan borrower is unable to make or refinance a balloon payment, we may experience greater losses than if the loan were structured as amortizing.

 

We may be exposed to higher risks with respect to our investments that include PIK interest, particularly our investments in interest-only loans.

 

To the extent our portfolio investments permit PIK interest and our portfolio companies elect to pay PIK interest, we will be exposed to higher risks, including the following:

 

  Because PIK interest results in an increase in the size of the loan balance of the underlying loan, our exposure to potential loss increases when we receive PIK interest;

 

  PIK instruments may have higher yields, which reflect the payment deferral and credit risk associated with these instruments;

 

  PIK accruals may create uncertainty about the source of our distributions to stockholders;

 

  PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of the collateral.

 

To the extent our investments are structured as interest-only loans, PIK interest will increase the size of the balloon payment due at the end of the loan term. PIK interest payments on such loans may increase the probability and magnitude of a loss on our investment, particularly with respect to our interest-only loans. As of February 28, 2023, 22.5% of our interest-only loans provided for contractual PIK interest, which represents contractual interest added to a loan balance and due at the end of such loan’s term, and 46.4% of such investments elected to pay a portion of interest due in PIK. As of February 28, 2023, 6.9% of the Company’s interest-only loans are loans that pay contractual PIK interest only.

 

The lack of liquidity in our investments may adversely affect our business.

 

We primarily make investments in private companies. A portion of these securities may be subject to legal and other restrictions on resale, transfer, pledge or other disposition or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. In addition, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our Investment Adviser has or could be deemed to have material non-public information regarding such business entity.

 

We may not have the funds to make additional investments in our portfolio companies which could impair the value of our portfolio.

 

After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment through the exercise of a warrant to purchase common stock. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation or may reduce the expected yield on the investment. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our level of risk, because we prefer other opportunities or because we are inhibited by compliance with BDC requirements, SBA regulations or the desire to maintain our RIC tax treatment. Our ability to make follow-on investments may also be limited by our Investment Adviser allocation policy.

 

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The debt securities in which we invest are subject to credit risk and prepayment risk.

 

An issuer of a debt security may be unable to make interest payments and repay principal. We could lose money if the issuer of a debt obligation is, or is perceived to be, unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. Substantially all of the debt investments held in our portfolio hold a non-investment grade rating by one or more rating agencies or, if not rated, would be rated below investment grade if they were rated, which are often referred to as “junk.”

 

Certain debt instruments may contain call or redemption provisions which would allow the issuer thereof to prepay principal prior to the debt instrument’s stated maturity. This is known as prepayment risk. Prepayment risk is greater during a falling interest rate environment as issuers can reduce their cost of capital by refinancing higher interest debt instruments with lower interest debt instruments. An issuer may also elect to refinance their debt instruments with lower interest debt instruments if the credit standing of the issuer improves. To the extent debt securities in our portfolio are called or redeemed, we may receive less than we paid for such security and we may be forced to reinvest in lower yielding securities or debt securities of issuers of lower credit quality.

 

Our investment in Saratoga CLO constitutes a leveraged investment in a portfolio of subordinated notes representing the lowest-rated securities issued by a pool of predominantly senior secured first lien term loans and is subject to additional risks and volatility. All losses in the pool of loans will be borne by our subordinated notes and only after the value of our subordinated notes is reduced to zero will the higher-rated notes issued by the pool bear any losses.

 

At February 28, 2023, our investment in the subordinated notes of Saratoga CLO, a collateralized loan obligation fund, had a fair value of $21.2 million and constituted 2.2% of our portfolio. This investment constitutes a first loss position in a portfolio that, as of February 28, 2023, was composed of $656.9 million in aggregate principal amount of primarily senior secured first lien term loans and $23.8 million in uninvested cash. In addition, as of February 28, 2023, we also own $9.4 million in aggregate principal of the F-2-R-3 Notes with a fair value of $8.8 million in the Saratoga CLO, that only rank senior to the subordinated notes. A first loss position means that we will suffer the first economic losses if the value of Saratoga CLO decreases. First loss positions typically carry a higher risk and earn a higher yield. Interest payments generated from this portfolio will be used to pay the administrative expenses of Saratoga CLO and interest on the debt issued by Saratoga CLO before paying a return on the subordinated notes.

 

Principal payments will be similarly applied to pay administrative expenses of Saratoga CLO and for reinvestment or repayment of Saratoga CLO debt before paying a return on, or repayment of, the subordinated notes. In addition, 80.0% of our fixed management fee and 100.0% our incentive management fee for acting as the collateral manager of Saratoga CLO is subordinated to the payment of interest and principal on Saratoga CLO debt. Any losses on the portfolio will accordingly reduce the cash flow available to pay these management fees and provide a return on, or repayment of, our investment. Depending on the amount and timing of such losses, we may experience smaller than expected returns and, potentially, the loss of our entire investment.

 

As the manager of the portfolio of Saratoga CLO, we will have some ability to direct the composition of the portfolio, but our discretion is limited by the terms of the debt issued by Saratoga CLO which may limit our ability to make investments that we feel are in the best interests of the subordinated notes, and the availability of suitable investments. The performance of Saratoga CLO’s portfolio is also subject to many of the same risks sets forth in this Annual Report with respect to portfolio investments in leveraged loans.

 

In the event that a bankruptcy court orders the substantive consolidation of us with Saratoga CLO, the creditors of Saratoga CLO, including the holders of $658.0 million aggregate principal amount of debt, as of February 28, 2023 issued by Saratoga CLO, would have claims against the consolidated bankruptcy estate, which would include our assets.

 

We believe that we have observed and will observe certain formalities and operating procedures that are generally recognized requirements for maintaining our separate existence and that our assets and liabilities can be readily identified as distinct from those of Saratoga CLO. However, we cannot assure you that a bankruptcy court would agree in the event that we or Saratoga CLO became a debtor in connection with a bankruptcy proceeding. If a bankruptcy court concludes that substantive consolidation of us with Saratoga CLO is warranted, the creditors of Saratoga CLO would have claims against the consolidated bankruptcy estate.

 

Substantive consolidation means that our assets are placed in a single bankruptcy estate with those of Saratoga CLO, rather than kept separate, and that the creditors of Saratoga CLO have a claim against that single estate (including our assets), as opposed to retaining their claims against only Saratoga CLO.

 

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Our investments in Saratoga CLO have a different risk profile than would direct investments made by us, including less information available and fewer rights regarding repayment compared to companies we invest in directly as well as complicated accounting and tax implications.

 

Due to our investments in the Saratoga CLO being primarily broadly syndicated loans, there may be less information available to us on those companies as compared to most investments that we make directly. For example, we will typically have fewer rights relating to how such companies manage their cash flow to repay debt, the inclusion of protective covenants, default penalties, lien protection, change of control provisions and board observation rights in deal terms, and our general ability to oversee the company’s operations. Our investment in Saratoga CLO is also subject to the risk of leverage associated with the debt issued by Saratoga CLO and the repayment priority of senior debt holders in Saratoga CLO.

 

The accounting and tax implications of such investments are complicated. In particular, reported earnings from the equity tranche investment of Saratoga CLO are recorded according to U.S. GAAP based upon an effective yield calculation. Current taxable earnings on these investments, however, will generally not be determinable until after the end of the fiscal year of Saratoga CLO that ends within the Company’s fiscal year, even though the investment is generating cash flow. In general, the U.S. federal income tax treatment of investment in Saratoga CLO may result in higher distributable earnings in the early years and a capital loss at maturity, while for reporting purposes the totality of cash flows are reflected in a constant yield to maturity.

 

The senior loan portfolio of Saratoga CLO may be concentrated in a limited number of industries or borrowers, which may subject Saratoga CLO, and in turn us, to a risk of significant loss if there is a downturn in a particular industry in which Saratoga CLO is concentrated.

 

Saratoga CLO has senior loan portfolios that may be concentrated in a limited number of industries or borrowers. A downturn in any particular industry or borrower in which Saratoga CLO is heavily invested may subject Saratoga CLO, and in turn us, to a risk of significant loss and could significantly impact the aggregate returns we realize. If an industry in which Saratoga CLO is heavily invested suffers from adverse business or economic conditions, a material portion of our investment in Saratoga CLO could be affected adversely, which, in turn, could adversely affect our financial position and results of operations. For example, as of February 28, 2023, Saratoga CLO’s investments in the banking, finance, insurance & real estate industry represented approximately 18.90% of the fair value of Saratoga CLO’s portfolio. Companies in the banking, finance, insurance & real estate industry are subject to general economic downturns and business cycles and will often suffer reduced revenues and rate pressures during periods of economic uncertainty. In addition, investments in business service represented approximately 10.9% of the fair value of Saratoga CLO’s portfolio. Changes in healthcare or other laws and regulations applicable to the businesses of some of the companies in which Saratoga CLO invests may occur that could increase their compliance and other costs of doing business, require significant systems enhancements, or render their products or services less profitable or obsolete, any of which could have a material adverse effect on their results of operations. There has also been an increased political and regulatory focus on healthcare laws in recent years, and new legislation could have a material effect on the business and operations of companies in which Saratoga CLO invests.

 

Failure by Saratoga CLO to satisfy certain debt compliance ratios may entitle senior debtholders to additional payments, which may harm our operating results by reducing payments we would otherwise be entitled to receive from Saratoga CLO.

 

The failure by Saratoga CLO to satisfy certain debt compliance ratios, specifically those with respect to adequate collateralization and/or interest coverage tests, could lead to a reduction in its payments to us. In the event that Saratoga CLO failed these certain tests, senior debt holders may be entitled to additional payments that would, in turn, reduce the payments we would otherwise be entitled to receive. Separately, we may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with Saratoga CLO or any other investment we may make. If any of these occur, it could materially and adversely affect our operating results and cash flows.

 

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Downgrades by rating agencies of broadly syndicated loans could adversely impact the financial performance of Saratoga CLO and its ability to pay equity distributions in the future.

 

Ratings agencies have undergone reviews of CLO tranches and their broadly syndicated loans in light of the COVID-19 pandemic’s adverse impact on the economic market. Such reviews have, in some cases, resulted in downgrades of broadly syndicated loans. Such downgrades of broadly syndicated loans, as well as downgrades of broadly syndicated loans in the future, could adversely impact the financial performance of Saratoga CLO, thereby limiting Saratoga CLO’s ability to pay equity distributions and subordinated management fees to the Company in the future. The full extent of downgrades by ratings agencies of broadly syndicated loans is currently unknown, thereby resulting in a high degree of uncertainty with respect to Saratoga CLO’s financial performance and ability to pay equity distributions and subordinated management fees to the Company in the future.

 

We may invest through joint ventures, partnerships or other special purpose vehicles and our investments through these vehicles may entail greater risks, or risks that we otherwise would not incur, if we otherwise made such investments directly.

 

We may make indirect investments in portfolio companies through joint ventures, partnerships or other special purpose vehicles, including SLF JV. In general, the risks associated with indirect investments in portfolio companies through a joint venture, partnership or other special purpose vehicle are similar to those associated with a direct investment in a portfolio company. While we intend to analyze the credit and business of a potential portfolio company in determining whether to make an investment in an investment vehicle, we will nonetheless be exposed to the creditworthiness of the investment vehicle. In the event of a bankruptcy proceeding against the portfolio company, the assets of the portfolio company may be used to satisfy its obligations prior to the satisfaction of our investment in the investment vehicle (i.e., our investment in the investment vehicle could be structurally subordinated to the other obligations of the portfolio company). In addition, if we are to invest in an investment vehicle, we may be required to rely on our partners in the investment vehicle when making decisions regarding such investment vehicle’s investments, accordingly, the value of the investment could be adversely affected if our interests diverge from those of our partners in the investment vehicle.

 

Available information about privately held companies is limited.

 

We invest primarily in privately-held companies. Generally, little public information exists about these companies, and we are required to rely on the ability of our Investment Adviser’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. These companies and their financial information are not subject to the Sarbanes-Oxley Act of 2002 and other rules that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments.

 

When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment.

 

We make both debt and minority equity investments; therefore, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.

  

Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.

 

Our portfolio companies usually will have, or may be permitted to incur, other debt, or issue other equity securities that rank equally with, or senior to, our investments. By their terms, such instruments may provide that the holders are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of our investments. These debt instruments will usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debtor ranking equally with our investments, we would have to share on an equal basis any distributions with other holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

 

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There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

 

If one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to that of other creditors. In addition, lenders can be subject to lender liability claims for actions taken by them where they become too involved in the borrower’s business or exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken if we actually render significant managerial assistance.

 

Investments in equity securities involve a substantial degree of risk.

 

We purchase common stock and other equity securities. Although equity securities have historically generated higher average total returns than fixed-income securities over the long-term, equity securities also have experienced significantly more volatility in those returns and in recent years have significantly underperformed relative to fixed-income securities. The equity securities we acquire may fail to appreciate and may decline in value or become worthless and our ability to recover our investment will depend on our portfolio company’s success. Investments in equity securities involve a number of significant risks, including:

 

  any equity investment we make in a portfolio company could be subject to further dilution as a result of the issuance of additional equity interests and to serious risks as a junior security that will be subordinate to all indebtedness or senior securities in the event that the issuer is unable to meet its obligations or becomes subject to a bankruptcy process;

 

  to the extent that the portfolio company requires additional capital and is unable to obtain it, we may not recover our investment in equity securities; and

 

  in some cases, equity securities in which we invest will not pay current dividends, and our ability to realize a return on our investment, as well as to recover our investment, will be dependent on the success of our portfolio companies. Even if the portfolio companies are successful, our ability to realize the value of our investment may be dependent on the occurrence of a liquidity event, such as a public offering or the sale of the portfolio company. It is likely to take a significant amount of time before a liquidity event occurs or we can sell our equity investments. In addition, the equity securities we receive or invest in may be subject to restrictions on resale during periods in which it could be advantageous to sell.

 

There are special risks associated with investing in preferred securities, including:

 

  preferred securities may include provisions that permit the issuer, at its discretion, to defer distributions for a stated period without any adverse consequences to the issuer. If we own a preferred security that is deferring its distributions, we may be required to report income for U.S. federal income tax purposes even though we have not received any cash payments in respect of such income;

 

  preferred securities are subordinated with respect to corporate income and liquidation payments, and are therefore subject to greater risk than debt;

 

  preferred securities may be substantially less liquid than many other securities, such as common securities or U.S. government securities; and

 

  preferred security holders generally have no voting rights with respect to the issuing company, subject to limited exceptions.

  

Our investments in foreign debt, including that of emerging market issuers, may involve significant risks in addition to the risks inherent in U.S. investments.

 

Although there are limitations on our ability to invest in foreign debt, we may, from time to time, invest in debt of foreign companies, including the debt of emerging market issuers. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility.

 

Investments in the debt of emerging market issuers may subject us to additional risks such as inflation, wage and price controls, and the imposition of trade barriers. Furthermore, economic conditions in emerging market countries are, to some extent, influenced by economic and securities market conditions in other emerging market countries. Although economic conditions are different in each country, investors’ reaction to developments in one country can have effects on the debt of issuers in other countries.

 

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Although most of our investments will be U.S. dollar-denominated, our investments that are denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments.

 

We may employ hedging techniques to minimize these risks, but we cannot assure you that we will fully hedge against these risks or that such strategies will be effective. As a result, a change in currency exchange rates may adversely affect our profitability.

 

We may expose ourselves to risks if we engage in hedging transactions.

 

We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Use of these hedging instruments may expose us to counter-party credit risk. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is generally anticipated at an acceptable price.

 

The success of our hedging transactions will depend on our ability to correctly predict movements in currencies and interest rates.

 

Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not entirely related to currency fluctuations. To the extent we engage in hedging transactions, we also face the risk that counterparties to the derivative instruments we hold may default, which may expose us to unexpected losses from positions where we believed that our risk had been appropriately hedged.

 

Our investments may be risky, and you could lose all or part of your investment.

 

Substantially all of our debt investments hold a non-investment grade rating by one or more rating agencies (which non- investment grade debt is commonly referred to as “high yield” and “junk” debt) or, where not rated by any rating agency, would be below investment grade or “junk”, if rated. A below investment grade or “junk” rating means that, in the rating agency’s view, there is an increased risk that the obligor on such debt will be unable to pay interest and repay principal on its debt in full. We also invest in debt that defers or pays PIK interest. To the extent interest payments associated with such debt are deferred, such debt will be subject to greater fluctuations in value based on changes in interest rates, such debt could produce taxable income without a corresponding cash payment to us, and since we generally do not receive any cash prior to maturity of the debt, the investment will be of greater risk.

 

In addition, private middle-market companies in which we invest are exposed to a number of significant risks, including:

 

  limited financial resources and an inability to meet their obligations, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment;

 

  shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;

 

  dependence on the management talents and efforts of a small group of persons; the death, disability, resignation or termination of one or more of which could have a material adverse impact on the company and, in turn, on us;

 

  less predictable operating results and, possibly, substantial additional capital requirements to support their operations, finance expansion or maintain their competitive position; and

 

  difficulty accessing the capital markets to meet future capital needs.

 

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In addition, our executive officers, directors and our Investment Adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies.

 

Our portfolio may continue to be concentrated in a limited number of industries, which may subject us to a risk of significant loss if there is a downturn in a particular industry in which a number of our investments are concentrated.

 

Our portfolio may continue to be concentrated in a limited number of industries. A downturn in any particular industry in which we are invested could significantly impact the aggregate returns we realize.

 

As of February 28, 2023, our investments in the Healthcare Software industry represented approximately 12.2% of the fair value of our portfolio and our investments in the IT Services industry represented approximately 9.0% of the fair value of our portfolio. In addition, we may from time to time invest a relatively significant percentage of our portfolio in industries we do not necessarily target. If an industry in which we have significant investments suffers from adverse business or economic conditions, as these industries have to varying degrees, a material portion of our investment portfolio could be affected adversely, which, in turn, could adversely affect our financial position and results of operations.

 

A number of our portfolio companies are in the Software-as-a-Service industry and such companies are subject to additional risks that are unique to that industry, and the financial results of our portfolio companies in the Software-as-a-Service industry could materially adversely affect our financial results.

 

A number of our portfolio companies are in the Software-as-a-Service (“SAAS”) industry and such companies are subject to additional risks that are unique to the SAAS industry. For example, such portfolio companies may be subject to consumer protection laws that are enforced by regulators such as the Federal Trade Commission (“FTC”) and private parties, and include statutes that regulate the collection and use of information for marketing purposes. Any new legislation or regulations regarding the Internet, mobile devices, software sales or export and/or the cloud or SAAS industry, and/or the application of existing laws and regulations to the Internet, mobile devices, software sales or export and/or the cloud or SAAS industry, could create new legal or regulatory burdens on our portfolio companies that could have a material adverse effect on their respective operations. As a result, our SAAS portfolio companies may incur significant operating losses and negative cash flows because of their respective life cycles, resulting in an adverse impact on their operations and on their ability to repay their debt. Because our SAAS portfolio companies are generally investments that are underwritten and valued on “recurring revenue” rather than EBITDA, the fair value determinations of such companies are inherently uncertain and may fluctuate over short periods of time. They are also subject to the risks that their customers have financial difficulties that make them unable or unwilling to pay for the software and services that drive a portfolio company’s recurring revenue projections. There is often less collateral securing our loans to these companies as compared to our other portfolio companies, which could impair our ability to be repaid if the portfolio companies default on their obligations or otherwise encounter financial difficulties. For these reasons, our financial results could be materially adversely affected if our portfolio companies in the SAAS industry encounter financial difficulty and fail to repay their obligations. As of February 28, 2023, our current total investments in SAAS companies were $596.4 million, or 61.3% of total investments.

  

If our primary investments are deemed not to be qualifying assets, we could be precluded from investing in our desired manner or deemed to be in violation of the 1940 Act.

 

In order to maintain our status as a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70.0% of our total assets are qualifying assets. We believe that most of the investments that we may acquire in the future will constitute qualifying assets. However, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs and be precluded from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or required to dispose of investments at inappropriate times in order to come into compliance with the 1940 Act. If we need to dispose of such investments quickly, it could be difficult to dispose of such investments on favorable terms. We may not be able to find a buyer for such investments and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes would have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, any failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. If we do not maintain our status as a BDC, we would be subject to regulation as a registered closed-end investment company under the 1940 Act. As a registered closed-end investment company, we would be subject to substantially more regulatory restrictions under the 1940 Act, which would significantly decrease our operating flexibility.

 

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RISKS RELATED TO OUR COMMON STOCK

 

Investing in our common stock may involve an above average degree of risk.

 

The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our common stock may not be suitable for someone with lower risk tolerance.

 

We may choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.

 

We have in the past, and may in the future, distribute taxable dividends that are payable to our stockholders in part through the issuance of shares of our common stock. For example, on October 30, 2013, our board of directors declared a dividend of $2.65 per share to shareholders payable in cash or shares of our common stock. Under certain applicable provisions of the Code and the Treasury regulations and a revenue procedure issued by the 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. If too many stockholders elect to receive their distributions in cash, we must allocate the cash available for distribution among the shareholders electing to receive cash (with the balance of the distribution paid in shares of our common stock). If we decide to make any distributions consistent with this revenue procedure that are payable in part in our stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend (whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale.

 

Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. If a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.

 

Due to the current market conditions, we may defer our dividends and choose to incur US federal excise tax in order preserve cash and maintain flexibility.

 

As a BDC, we are not required to make any distributions to shareholders other than in connection with our election to be treated a RIC for U.S. federal income tax purposes as under Subchapter M of the Code. In order to maintain our tax treatment as a RIC, we generally must distribute to shareholders for each taxable year at least 90% of our investment company taxable income (i.e., net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses). If we qualify for taxation as a RIC, we generally will not be subject to US federal income tax at corporate rates on our investment company taxable income and net capital gains (i.e., realized net long- term capital gains in excess of realized net short-term capital losses) that we timely distribute to shareholders. We will be subject to U.S. federal income tax on our investment company taxable income and net capital gains that we do not timely distribute to shareholders. In addition, we will be subject to a nondeductible 4% U.S. federal excise tax on undistributed earnings of a RIC unless we distribute each calendar year at least the sum of (i) 98% of our net ordinary income for the calendar year, (ii) 98.2% of our capital gain net income for the one-year period ending on October 31 of the calendar year, and (iii) any net ordinary income and capital gain net income that we recognized for preceding years, but were not distributed during such years, and on which we paid no U.S. federal income tax.

 

Under the Code, we may satisfy certain of our RIC distributions with dividends paid after the end of the current calendar year. In particular, if we pay a distribution in January of the following year that was declared in October, November, or December of the current year and is payable to shareholders of record in the current year, the dividend will be treated for all US federal tax purposes as if it were paid on December 31 of the current year. In addition, under the Code, we may pay dividends, referred to as “spillover dividends,” that are paid during the following taxable year that will allow us to maintain our qualification for taxation as a RIC and eliminate our liability for U.S. federal income tax at corporate rates. Under these spillover dividend procedures, because our taxable year ends on February 28 or 29, we may defer distribution of income earned during the current taxable year until February of the following taxable year. For example, we may defer distributions of income earned during the year ended February 28, 2023 until as late as February 28, 2024. If we choose to carry-over this distribution of income in the form of a spillover dividend, we will incur the 4% U.S. federal excise tax on some or all of the distribution.

 

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Due to current market conditions (as described herein) we anticipate that we may take certain actions with respect to the timing and amounts of our distributions in order to preserve cash and maintain flexibility. For example, we may reduce our dividends and/or defer our dividends to the following taxable year. If we defer our dividends, we may choose to utilize the spillover dividend rules discussed above and incur the 4% U.S. federal excise tax on such amounts. To further preserve cash, we may combine these reductions or deferrals of dividends with one or more distributions that are payable partially in our stock. (see “We may choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive” for more information).

 

The market price of our common stock may fluctuate significantly.

 

The market price and liquidity of the market for our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to:

 

  significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which are not necessarily related to the operating performance of these companies;

 

  changes in regulatory policies, accounting pronouncements or tax guidelines, particularly with respect to RICs, BDCs or SBICs;

 

  failure to qualify for RIC tax treatment;

 

  changes in the value of our portfolio of investments;

 

  any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;

 

  departure of any of Saratoga Investment Advisors’ key personnel;

 

  operating performance of companies comparable to us;

 

  general economic trends and other external factors; or

 

  loss of a major funding source.

 

Our business and operation could be negatively affected if we become subject to any securities litigation or shareholder activism, which could cause us to incur significant expense, hinder execution of investment strategy and impact our stock price.

 

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Shareholder activism, which could take many forms or arise in a variety of situations, has been increasing in the BDC space recently. While we are currently not subject to any securities litigation or shareholder activism, due to the potential volatility of our stock price and for a variety of other reasons, we may in the future become the target of securities litigation or shareholder activism. Securities litigation and shareholder activism, including potential proxy contests, could result in substantial costs and divert management’s and our board of directors’ attention and resources from our business.

 

Additionally, such securities litigation and shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation and activist shareholder matters. Further, our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and shareholder activism.

 

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There is a risk that you may not receive distributions or that our distributions may not grow over time.

 

As a BDC for 1940 Act purposes and a RIC for U.S. federal income tax purposes, we intend to make distributions out of assets legally available for distribution to our stockholders once such distributions are authorized by our board of directors and declared by us. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or periodically increase our dividend rate. In addition, due to the asset coverage test that is applicable to us as a BDC, and provisions contained in the agreements governing our borrowings, we may be limited in our ability to make distributions. Further, if we invest a greater amount of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution.

 

Provisions of our governing documents and the Maryland General Corporation Law could deter future takeover attempts and have an adverse impact on the price of our common stock.

 

We are governed by our charter and bylaws, which we refer to as our “governing documents.”

 

Our governing documents and the Maryland General Corporation Law contain provisions that may have the effect of delaying, deferring or preventing a future transaction or change in control of us that might involve a premium price for our stockholders or otherwise be in their best interest.

 

Our charter provides for the classification of our board of directors into three classes of directors, serving staggered three-year terms, which may render a change of control of us or removal of our incumbent management more difficult. Furthermore, any and all vacancies on our board of directors will be filled generally only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term until a successor is elected and qualifies.

 

Our board of directors is authorized to create and issue new series of shares, to classify or reclassify any unissued shares of stock into one or more classes or series, including preferred stock and, without stockholder approval, to amend our charter to increase or decrease the number of shares of stock that we have authority to issue, which could have the effect of diluting a stockholder’s ownership interest. Prior to the issuance of shares of stock of each class or series, including any reclassified series, our board of directors is required by our governing documents to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series of shares of stock.

 

Our governing documents also provide that our board of directors has the exclusive power to adopt, alter or repeal any provision of our bylaws, and to make new bylaws. The Maryland General Corporation Law also contains certain provisions that may limit the ability of a third party to acquire control of us, such as:

 

  The Maryland Business Combination Act, which, subject to certain limitations, prohibits certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the common stock or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder and, thereafter, imposes special minimum price provisions and special stockholder voting requirements on these combinations; and

 

  The Maryland Control Share Acquisition Act, which provides that “control shares” of a Maryland corporation (defined as shares of common stock which, when aggregated with other shares of common stock controlled by the stockholder, entitles the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares of common stock.

  

In addition, the provisions of the Maryland Business Combination Act will not apply, however, if our board of directors adopts a resolution that any business combination between us and any other person will be exempt from the provisions of the Maryland Business Combination Act. Although our board of directors has adopted such a resolution, there can be no assurance that this resolution will not be altered or repealed in whole or in part at any time. If the resolution is altered or repealed, the provisions of the Maryland Business Combination Act may discourage others from trying to acquire control of us.

 

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As permitted by Maryland law, our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of our common stock. Although our bylaws include such a provision, such a provision may also be amended or eliminated by our board of directors at any time in the future, subject to obtaining confirmation from the SEC that it does not object to us being subject to the Maryland Control Share Acquisition Act.

 

Our common stock may trade at a discount to our NAV per share.

 

Common stock of BDCs, as closed-end investment companies, frequently trade at a discount to NAV. Our common stock has traded at a discount to our NAV since shortly after our initial public offering. The risk that our common stock may continue to trade at a discount to our NAV is separate and distinct from the risk that our NAV per share may decline.

 

Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current NAV per share of our common stock.

 

The 1940 Act prohibits us from selling shares of our common stock at a price below the current NAV per share of such stock, with certain exceptions. One such exception is prior stockholder approval of issuances below NAV provided that our board of directors makes certain determinations. We do not currently have stockholder approval of issuances below NAV.

 

If we were to sell shares of our common stock below NAV per share, such sales would result in an immediate dilution to the NAV per share. This dilution would occur as a result of the sale of shares at a price below the then current NAV per share of our common stock and a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance.

 

Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted.

 

The issuance of subscription rights, warrants or convertible debt that are exchangeable for our common stock, will cause your economic interest and voting power in us to be diluted as a result of our offering of any such securities.

 

Stockholders who do not fully exercise rights, warrants or convertible debt issued to them in any offering of subscription rights, warrants or convertible debt to purchase our common stock should expect that they will, at the completion of the offering, own a smaller proportional economic interest and have diminished voting power in us than would otherwise be the case if they fully exercised their rights, warrants or convertible debt. We cannot state precisely the amount of any such dilution in share ownership or voting power because we do not know what proportion of the common stock would be purchased as a result of any such offering.

 

In addition, if the subscription price, warrant price or convertible debt price is less than our NAV per share of common stock at the time of such offering, then our stockholders would experience an immediate dilution of the aggregate NAV of their shares as a result of the offering. The amount of any such decrease in NAV is not predictable because it is not known at this time what the subscription price, warrant price, convertible debt price or NAV per share will be on the expiration date of such offering or what proportion of our common stock will be purchased as a result of any such offering. The risk of dilution is greater if there are multiple rights offerings. However, our board of directors will make a good faith determination that any offering of subscription rights, warrants or convertible debt would result in a net benefit to existing stockholders.

 

Finally, our common stockholders will bear all costs and expenses incurred by us in connection with any proposed offering of subscription rights, warrants or convertible debt that are exchangeable for our common stock, whether or not such offering is actually completed by us.

 

RISKS RELATED TO OUR NOTES

 

The Notes are unsecured and therefore are effectively subordinated to any existing and future secured indebtedness, including indebtedness under our Encina Credit Facility.

 

The Notes are not secured by any of our assets or any of the assets of any of our subsidiaries, including our wholly owned subsidiaries. As a result, the Notes are effectively subordinated to any existing and future secured indebtedness we or our subsidiaries have outstanding (including our Encina Credit Facility) or that we or our subsidiaries may incur in the future (or any indebtedness that is initially unsecured as to which we have granted or subsequently grant a security interest) to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under our Encina Credit Facility. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our secured indebtedness or secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes. As of February 28, 2023, there was $32.5 million outstanding borrowings under the Credit Facility and we had the ability to borrow up to $65.0 million under the Encina Credit Facility, subject to certain conditions. The Encina Credit Facility is secured by substantially all of the assets of SIF II, our wholly owned subsidiary.

 

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The Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

 

The Notes are obligations exclusively of Saratoga Investment Corp., and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes and the Notes are not required to be guaranteed by any subsidiary we may acquire or create in the future. Any assets of our subsidiaries are not directly available to satisfy the claims of our creditors, including holders of the Notes. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such entities. Even if we are recognized as a creditor of one or more of these entities, our claims would still be effectively subordinated to any security interests in the assets of any such entity and to any indebtedness or other liabilities of any such entity senior to our claims. Consequently, the Notes are structurally subordinated to all indebtedness and other liabilities of any of our existing or future indebtedness of our subsidiaries, including the SBA-guaranteed debentures. These entities may incur substantial indebtedness in the future, all of which would be structurally senior to the Notes. As of February 28, 2023, we had $202.0 million in SBA-guaranteed debentures outstanding. The indebtedness under the SBA-guaranteed debentures is structurally senior to the Notes.

 

The indenture under which the Notes are issued contains limited protection for holders of the Notes.

 

The indenture under which the Notes are issued offers limited protection to holders of the Notes.

 

The terms of the indenture and the Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on your investment in the Notes. In particular, the terms of the indenture and the Notes do not place any restrictions on our or our subsidiaries’ ability to:

 

  issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the Notes with respect to the assets of these entities, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act), but giving effect, in each case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from incurring additional borrowings, including through the issuance of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% after such borrowings;

 

  sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);

 

  enter into transactions with affiliates;

 

  create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;

 

  make investments; or

 

  create restrictions on the payment of dividends or other amounts to us from our subsidiaries.

 

Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity.

 

57

 

 

Our ability to recapitalize, incur additional debt (including additional debt that matures prior to the maturity of the Notes), and take a number of other actions that are not limited by the terms of the Notes may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the market value of the Notes.

 

Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default. For example, the indenture under which the Notes is issued do not contain cross-default provisions that are contained in the Encina Credit Facility. The issuance or incurrence of any such debt with incremental protections could affect the market for, trading levels and prices of the Notes.

 

We may not be able to repurchase the 4.375% 2026 Notes and the 4.35% 2027 Notes upon a Change of Control Repurchase Event.

 

Upon a Change of Control Repurchase Event (as defined in the relevant indenture), holders of the 4.375% 2026 Notes and the 4.35% 2027 Notes may require us to repurchase for cash some or all of the 4.375% 2026 Notes and the 4.35% 2027 Notes, respectively, at a repurchase price equal to 100% of the aggregate principal amount of the 4.375% 2026 Notes and the 4.35% 2027 Notes, respectively, being repurchased, plus their respective accrued and unpaid interest to, but not including, the repurchase date. We may not be able to repurchase the 4.375% 2026 Notes and the 4.35% 2027 Notes upon a Change of Control Repurchase Event because we may not have sufficient funds. Our and our subsidiaries’ future financing facilities may contain similar restrictions and provisions. Our failure to purchase such tendered 4.375% 2026 Notes and the 4.35% 2027 Notes upon the occurrence of such Change of Control Repurchase Event would cause an event of default under the respective indenture governing the 4.375% 2026 Notes and the 4.35% 2027 Notes, respectively, which may result in the acceleration of such indebtedness requiring us to repay that indebtedness immediately. If the holders of the 4.375% 2026 Notes and the 4.35% 2027 Notes exercise their respective right to require us to repurchase the 4.375% 2026 Notes and the 4.35% 2027 Notes, respectively, upon a Change of Control Repurchase Event, the financial effect of any such repurchase could cause a default under our current and future debt instruments, even if the Change of Control Repurchase Event itself would not cause a default. If a Change of Control Repurchase Event were to occur, we may not have sufficient funds to repay any such accelerated indebtedness.

 

An active trading market for the Public Notes may not develop or be sustained, which could limit the market price of the Public Notes or the ability to sell them.

 

Although each of the 6.00% 2027 Notes, 8.00% 2027 Notes, 8.125% 2027 Notes, and the 8.50% fixed-rate notes due 2028 (the “8.50% 2028 Notes”) are listed on the NYSE under the symbol “SAT”, “SAJ”, “SAY”, and “SAZ”, respectively, we cannot provide any assurances that an active trading market will develop or be maintained for the Public Notes or that the Public Notes will be able to be sold. At various times, the Public Notes may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, if any, general economic conditions, our financial condition, performance and prospects and other factors. Accordingly, we cannot provide any assurance that a liquid trading market will develop for the Public Notes, or that the Public Notes will be able to be sold at a particular time or at a favorable price. To the extent an active trading market does not develop, the liquidity and trading price for the Public Notes may be harmed. At the same time, the trading market for the Public Notes may also be very volatile, and many of the risk factors related to our common stock and outlined above in “Risks Related to Our Common Stock” could also be applicable to the Public Notes.

 

Terms relating to redemption may materially adversely affect the return on our Notes.

 

Subject to their terms, we may redeem the Notes from time to time, especially when prevailing interest rates are lower than the rate borne by the Notes. If prevailing rates are lower at the time of redemption, you would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the Notes being redeemed. Our redemption right also may adversely impact your ability to sell the Notes as the optional redemption date or period approaches.

 

The 6.00% 2027 Notes mature on April 30, 2027 and commencing April 27, 2024, may be redeemed in whole or in part at any time or from time to time at our option.   The 8.00% 2027 Notes mature on October 31, 2027 and commencing October 27, 2024, may be redeemed in whole or in part at any time or from time to time at our option. The 8.125% 2027 Notes mature on December 31, 2027 and commencing December 13, 2024, may be redeemed in whole or in part at any time or from time to time at our option. The 8.50% 2028 Notes mature on April 15, 2028 and commencing April 14, 2025, may be redeemed in whole or in part at any time or from time to time at our option.

 

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The 4.375% 2026 Notes are redeemable, in whole or in part, at any time at our option prior to November 28. 2025, at par plus a “make-whole” premium, and thereafter at par. The 4.35% 2027 Notes are redeemable, in whole or in part, at any time at our option prior to November 28, 2026, at par plus a “make-whole” premium, and thereafter at par.

 

The 7.00% 2025 Notes mature on September 8, 2025 and commencing September 8, 2024, may be redeemed in whole or in part at any time or from time to time at our option, at par plus a “make-whole” premium, and thereafter at par. 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, subject to a fee depending on the date of repayment, at par plus a “make-whole” premium, and thereafter at par.  The 6.25% 2027 Notes mature on December 29, 2027 and may be redeemed in whole or in part at any time or from time to time at our option, on or after December 29, 2024, at par plus a “make-whole” premium, and thereafter at par.

 

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.

 

Any default under the agreements governing our indebtedness, including a default under the Encina Credit Facility, indenture governing each of the Notes or other indebtedness to which we may be a party that is not waived by the required lenders or the holders, and the remedies sought by the lenders or the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, as applicable, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness (including the Encina Credit Facility and the Notes. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Encina Credit Facility or other debt we may incur in the future could elect to terminate their commitment, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. In addition, any such default may constitute a default under the Notes, which could further limit our ability to repay our debt, including the Notes.

 

Our ability to generate sufficient cash flow in the future is, to some extent, subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us under the Encina Credit Facility or otherwise, in an amount sufficient to enable us to meet our payment obligations under the Notes and the Encina Credit Facility, and to fund other liquidity needs.

 

If our operating performance declines and we are not able to generate sufficient cash flow to service our debt obligations, we may, in the future, need to refinance or restructure our debt, including any Notes sold, sell assets, reduce or delay capital investments, seek to raise additional capital or seek to obtain waivers from the required lenders under the Encina Credit Facility, the holders of the respective Notes, or other debt that we may incur in the future to avoid being in default. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the Notes and our other debt. If we breach our covenants under the Encina Credit Facility, the Notes or other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or the holders thereof. If this occurs, we would be in default under the Encina Credit Facility, the Notes or other debt, the lenders or holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations could proceed against the collateral securing the debt.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

We do not own any real estate or other physical properties important to our operations, however, an affiliate of our Investment Adviser leases office space for our executive offices at 535 Madison Avenue, New York, New York 10022.

 

ITEM 3. LEGAL PROCEEDINGS

 

Neither we nor our wholly owned subsidiaries are currently subject to any material legal proceedings. From time to time, we, our consolidated subsidiaries and/or Saratoga Investment Advisors may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Our business also is subject to extensive regulation, which may result in regulatory proceedings against us.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

59

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Price range of common stock

 

Our common stock is traded on the New York Stock Exchange under the symbol “SAR.” The following table lists the high and low closing sales prices for the Company’s common stock and such closing sales prices’ percentage of premium or discount to the net asset value (“NAV”) for the two most recent fiscal years and the current fiscal year to date.

 

       Price Range         
   NAV(1)   High   Low   Percentage of High Closing Sales Price as a Premium (Discount) to NAV(2)   Percentage of Low Closing Sales Price as a Premium (Discount) to NAV(2) 
Fiscal Year Ending February 28, 2024                    
First Quarter through May 1, 2023  $*   $27.76   $22.82    *    *. 
Fiscal Year Ended February 28, 2023                         
First Quarter  $28.69   $28.31   $24.98    (1.3)%   (12.9)%
Second Quarter  $28.27   $26.95   $22.70    (4.7)%   (19.7)%
Third Quarter  $28.25   $27.16   $20.36    (3.9)%   (27.9)%
Fourth Quarter  $29.17   $27.77   $25.02    (4.8)%   (14.2)%
Fiscal Year Ended February 28, 2022                         
First Quarter  $28.70   $26.54   $22.66    (7.5)%   (21.1)%
Second Quarter  $28.97   $28.90   $25.70    (0.2)%   (11.3)%
Third Quarter  $29.17   $29.80   $27.19    2.2%   (6.8)%
Fourth Quarter  $29.32   $29.51   $25.20    0.6%   (14.1)%

 

 

* Net asset value has not yet been calculated for this period.
   
(1) Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices.
   
(2) Calculated as the respective high or low closing sales price divided by the quarter end net asset value and subtracting 1.

 

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Summarized Financial Highlights

 

The following table summarizes ten years of financial highlights:

 

   For the year ended 
Per share data  February 28,
2023
   February 28,
2022
   February 28,
2021
   February 29,
2020
   February 28,
2019
 
Net asset value at beginning of period  $29.33   $27.25   $27.13   $23.62   $22.96 
Adoption of ASC 606   -    -    -         (0.01)
Net asset value at beginning of period, as adjusted   29.33    27.25    27.13    23.62    22.95 
Net investment income(1)   2.94    1.74    2.07    1.59    2.60 
Net realized and unrealized gains (losses) on investments(1)   (0.75)   2.46    (0.74)   4.56    0.03 
Realized losses on extinguishment of debt*   (0.13)   (0.21)   (0.01)   (0.17)   - 
Net increase in net assets resulting from operations   2.06    3.99    1.32    5.98    2.63 
Distributions declared from net investment income   (2.28)   (1.93)   (1.23)   (2.21)   (2.06)
Total distributions to stockholders   (2.28)   (1.93)   (1.23)   (2.21)   (2.06)
Issuance of common stock above net asset value(2)   -    -    -    -    0.15 
Repurchases of common stock(3)   0.17    0.01    0.13    -    - 
Dilution(4)   (0.10)   -    (0.10)   (0.26)   (0.05)
Net asset value at end of period  $29.18   $29.33   $27.25   $27.13   $23.62 
                          
Per share market value at end of period  $27.55   $27.47   $23.08   $22.91   $23.04 
Total return based on market value(5)   10.35%   28.19%   7.63%   9.28%   16.11%
Total return based on net asset value(5)(6)   9.46%   15.88%   7.31%   26.22%   13.33%
Shares outstanding at end of period   11,890,500    12,131,350    11,161,416    11,217,545    7,657,156 
                          
Ratio/Supplemental data:                         
Net assets at end of period   346,958,042    355,780,523    304,185,770    304,286,853    180,875,187 
Ratio of total expenses to average net assets*   18.91%   16.09%   13.11%   18.34%   19.12%
Ratio of net investment income to average net assets*   10.23%   6.05%   7.77%   6.31%   11.22%
Portfolio turnover rate(7)   24.05%   33.59%   25.26%   36.82%   35.26%

 

    For the year ended 
Per share data   February 28,
2018
    February 28,
2017
    February 29,
2016
    February 28,
2015
    February 28,
2014
 
Net asset value at beginning of period  $21.97   $22.06   $22.70   $21.08   $22.71 
Adoption of ASC 606   -    -    -    -    - 
Net asset value at beginning of period, as adjusted   21.97    22.06    22.70    21.08    22.71 
Net investment income(1)   2.11    1.94    1.91    1.80    1.80 
Net realized and unrealized gains (losses) on investments(1)   0.82    0.30    0.18    0.24    (0.07)
Realized losses on extinguishment of debt*   -    (0.26)   -    -    - 
Net increase in net assets resulting from operations   2.93    2.24    2.09    2.04    1.73 
Distributions declared from net investment income   (1.90)   (1.93)   (2.36)   (0.40)   (2.65)
Total distributions to stockholders   (1.90)   (1.93)   (2.36)   (0.40)   (2.65)
Issuance of common stock above net asset value(2)   -    -    -    -    - 
Repurchases of common stock(3)   -    -    -    -    - 
Dilution(4)   (0.04)   (0.14)   (0.37)   (0.02)   (0.71)
Net asset value at end of period  $22.96   $21.97   $22.06   $22.70   $21.08 
                          
Per share market value at end of period  $21.86   $22.74   $14.22   $15.76   $15.85 
Total return based on market value(5)   5.28%   80.83%   4.27%   1.63%   9.10%
Total return based on net asset value(5)(6)   14.45%   12.62%   11.10%   10.09%   8.75%
Shares outstanding at end of period   6,257,029    5,794,600    5,672,227    5,401,899    5,379,616 
                          
Ratio/Supplemental data:                         
Net assets at end of period   143,691,367    127,294,777    125,149,875    122,598,742    113,427,929 
Ratio of total expenses to average net assets*   19.05%   17.27%   15.46%   14.85%   12.59%
Ratio of net investment income to average net assets*   9.37%   8.71%   8.52%   8.11%   7.97%
Portfolio turnover rate(7)   19.73%   43.76%   26.22%   31.28%   37.82%

 

 

* Certain prior period amounts have been reclassified to conform to current period presentation.
   
(1) Per share amounts are calculated using the weighted average shares outstanding during the period.

 

61

 

 

(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 11, Stockholders’ Equity. See Note 13, Dividend.
   
(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 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) 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.
   
(6) 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.
   
(7) 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.

 

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 (the “Share Repurchase Plan”). On October 7, 2015, our board of directors extended the 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, our board of directors extended the 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, our board of directors extended the 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, our board of directors increased the Share Repurchase Plan to 1.3 million shares of common stock. On January 5, 2021 and January 4, 2022, our board of directors extended the Share Repurchase Plan for another year to January 15, 2022, leaving the number of shares unchanged at 1.3 million shares of common stock. On January 9, 2023, our board of directors extended the Share Repurchase Plan for another year to January 15, 2024, increasing the number of shares to 1.7 million shares of common stock. As of February 28, 2023, the Company purchased 946,627 shares of common stock, at the average price of $21.83 for approximately $20.7 million pursuant to the Share Repurchase Plan. During the three months ended February 28, 2023, the Company purchased 48,594 shares of common stock, at the average price $25.19 for approximately $1.2 million pursuant to the Share Repurchase Plan. During the year ended February 28, 2023, the Company purchased 438,192 shares of common stock, at the average price $24.70 for approximately $10.8 million pursuant to the Share Repurchase Plan.

 

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As shown in the table below, as of February 28, 2023, we had purchased 946,627 shares of common stock pursuant to the Share Repurchase Plan, at the average price of $21.83 for approximately $20.7 million pursuant to the Share Repurchase Plan.

 

Period   

Total Number of Shares (or Units) Purchased

    

Average Price per Share (or Unit)

    

Total Number of Shares (or Units) Purchased as Part of Publicly
Announced Plans or
Programs

    

Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

 
March 1, 2015 through November 30, 2015   2,500   $15.59    2,500    397,500 
December 1, 2015 through December 31, 2015   -   $-    2,500    397,500 
January 1, 2016 through January 31, 2016   4,200   $13.86    6,700    393,300 
February 1, 2016 through February 29, 2016   18,717   $13.86    25,417    374,583 
March 1, 2016 through March 31, 2016   16,282   $14.57    41,699    358,301 
April 1, 2016 through April 30, 2016   7,858   $16.22    49,557    350,443 
May 1, 2016 through May 31, 2016   21,357   $16.29    70,914    329,086 
June 1, 2016 through June 30, 2016   8,310   $16.50    79,224    320,776 
July 1, 2016 through July 31, 2016   19,212   $17.31    98,436    301,564 
August 1, 2016 through August 31, 2016   40,058   $17.44    138,494    261,506 
September 1, 2016 through September 30, 2016   40,221   $18.04    178,715    221,285 
October 1, 2016 through October 31, 2016   27,076   $18.10    205,791    394,209 
November 1, 2016 through November 30, 2016   8,600   $18.24    214,391    385,609 
December 1, 2016 through December 31, 2016   4,100   $18.57    218,491    381,509 
January 1, 2017 through February 29, 2020   -    -    218,491    381,509 
March 1, 2020 through February 28, 2021   190,321   $18.96    408,812    891,188 
March 1, 2021 through February 28, 2022   99,623   $25.55    508,435    791,565 
March 1, 2022 through February 28, 2023   438,192   $24.70    946,627    353,373 
Total   946,627   $21.83           

 

Holders

 

The last reported closing sale price of our common stock on May 1, 2023 was $25.61 per share, which represents a discount of approximately 12.7% to the NAV reported as of February 28, 2023. As of May 1, 2023, there were 11 holders of record of our common stock.

 

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Dividend Policy

 

Our distributions, if any, will be determined by our board of directors and paid out of assets legally available for distribution. Any such distributions generally will be taxable to our stockholders, including to those stockholders who receive additional shares of our common stock pursuant to our dividend reinvestment plan. Prior to January 2009, we paid quarterly dividends to our stockholders. However, in January 2009, we suspended the practice of paying quarterly dividends to our stockholders and thereafter, paid five annual dividend distributions (December 2013, 2012, 2011, 2010 and 2009) to our stockholders since such time, which distributions were made with a combination of cash and the issuance of shares of our common stock as discussed more fully below.

 

On September 24, 2014, we announced the recommencement of quarterly dividends to our stockholders. 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.

 

We are prohibited from making distributions that cause us to fail to maintain the asset coverage ratio stipulated by the 1940 Act, subject to certain exceptions, or that violate our debt covenants.

 

In order to maintain tax treatment as a RIC, we generally must for each fiscal year timely distribute an amount equal to at least 90% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. In addition, we will be subject to U.S. federal excise taxes to the extent we do not distribute during the calendar year at least (1) 98% of our net ordinary income for the calendar year, (2) 98.2% of our capital gain net income for the one-year period ending on October 31 of the calendar year and (3) any net ordinary income and capital gain net income that we recognized for preceding years, but were not distributed during such years, and on which we paid no U.S. federal income tax. For the 2019, 2018 and 2017 calendar year, the Company made distributions sufficient such that we did not incur any U.S. federal excise taxes. For the 2014, 2015, 2016, 2020 and 2021 calendar years, our distributions were insufficient such that we incurred U.S. federal excise taxes. We may elect to withhold from distribution a portion of our ordinary income for the 2022 calendar year and/or portion of the capital gains in excess of capital losses realized during the one-year period ending October 31, 2022, if any, and, if we do so, we would expect to incur U.S. federal excise taxes as a result.

 

In accordance with certain applicable provisions of the Code and the Treasury regulations and a revenue procedure issued by the 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. If too many stockholders elect to receive cash, the cash available for distribution must be allocated among the shareholders electing to receive cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive the lesser of (a) the portion of the distribution such shareholder has elected to receive in cash or (b) an amount equal to his or her entire distribution times the percentage limitation on cash available for distribution. 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. Stockholders receiving such distributions (whether received in cash, our stock, or a combination thereof) will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain or qualified dividend income to the extent such distribution is properly reported as such) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. 

 

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Performance Graph

 

The following graph compares the return on our common stock with that of the Standard & Poor’s 500 Stock Index, the NASDAQ Financial 100 index and the Standard & Poor’s BDC Index, for the period from March 23, 2007, the date our common stock began trading, through February 28, 2023. The graph assumes that, on March 23, 2007, a person invested $100 in each of our common stock, the Standard & Poor’s 500 Stock Index, the NASDAQ Financial 100 index and the Standard & Poor’s BDC Index. The graph measures total shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are reinvested in like securities.

 

 

 

Outstanding Securities and Debt

 

The following table shows our outstanding classes of securities and debt as of February 28, 2023.

 

(a)
Title of Class
  (b)
Amount Authorized
   (c)
Amount Held by us or for Our Account
   (d)
Amount Outstanding Exclusive of Amounts Shown Under (c)
 
Securities:            
Common Stock   100,000,000    11,890,500   $88,109,500 
Debt:               
Encina credit facility  $50,000,000   $32,500,000   $17,500,000 
SBA Debentures  $325,000,000  $202,000,000   $59,000,000 
6.00% 2025 Notes  $12,000,000   $12,000,000   $- 
7.75% 2025 Notes  $5,000,000   $5,000,000   $- 
4.375% 2026 Notes  $175,000,000   $175,000,000   $- 
4.35% 2027 Notes  $75,000,000   $75,000,000   $- 
6.00% 2027 Notes  $105,500,000   $105,500,000   $- 
6.25% 2027 Notes  $15,000,000   $15,000,000   $- 
8.00% 2027 Notes  $46,000,000   $46,000,000   $- 
8.125% 2027 Notes  $60,375,000   $60,375,000   $- 

 

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FEES AND EXPENSES

 

The following table is intended to assist you in understanding the costs and expenses that an investor will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this report contains a reference to fees or expenses paid by “you,” “us” or “Saratoga Investment Corp.,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Saratoga Investment Corp.

 

Stockholder transaction expenses (as a percentage of offering price):       
Sales load paid   -% (1)
Offering expenses borne by us   -% (2)
Dividend reinvestment plan expenses   None  (3)
Total stockholder transaction expenses paid   -%   
Annual estimated expenses (as a percentage of average net assets attributable to common stock):        
Management fees   4.7% (4)
Incentive fees payable under the Management Agreement   1.4% (5)
Interest payments on borrowed funds   9.5% (6)
Other expenses   2.9% (7)
Total annual expenses   18.5% (8)

 

 

(1) In the event that the shares of common stock are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load.

 

(2) The prospectus supplement corresponding to each offering will disclose the applicable offering expenses and total stockholder transaction expenses.

 

(3) The expenses associated with the administration of our dividend reinvestment plan are included in “Other expenses.” The participants in the dividend reinvestment plan will pay a pro rata share of brokerage commissions incurred with respect to open market purchases, if any, made by the administrator under the dividend reinvestment plan.

 

(4) Our base management fee under the Management Agreement with Saratoga Investment Advisors is based on our gross assets, which is defined as our total assets, including those acquired using borrowings for investment purposes, but excluding cash and cash equivalents. See “Investment Advisory and Management Agreement” in Part I, Item 1 of this Annual Report. The fact that our base management fee is payable based upon our gross assets, rather than our net assets (i.e., total assets after deduction of any liabilities, including borrowings) means that our base management fee as a percentage of net assets attributable to common stock will increase when we utilize leverage.

 

(5) The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20% of our “pre-incentive fee net investment income” for the immediately preceding quarter, subject to a preferred return, or “hurdle,” and a “catch up” feature. For this purpose, “pre-incentive fee net investment income” means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that we receive from portfolio companies) accrued by us during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement described below, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). 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% 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 year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. Under the Management Agreement, 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 Saratoga Investment Advisors will be entitled to 20% of incentive fee capital 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 will equal the fair value of such investments as of such date. See “Investment Advisory and Management Agreement.”

 

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(6) We may borrow funds from time to time to make investments to the extent we determine that the economic situation is conducive to doing so. The 9.5% figure in the table includes all expected borrowing costs that we expect to incur over the next twelve months in connection with Encina Credit Facility. The costs associated with our outstanding borrowings are indirectly borne by our stockholders. We do not expect to issue any preferred stock during the next twelve months and, therefore, have not included the cost of issuing and servicing preferred stock in the table. In addition, all of the commitment fees, interest expense, amortized financing costs of our Credit Facility, SBA debentures and the 7.00% 2025 Notes, 7.75% 2025 Notes, 4.375% 2026 Notes, the 4.35% 2027 Notes,  6.00% 2027 Notes, the 6.25% 2027 Notes, the 8.00% 2027 Notes, and the 8.125% 2027 Notes, and the fees and expenses of issuing and servicing any other borrowings or leverage that we expect to incur during the next twelve months are included in the table and expense example presentation below. On April 16, 2018, our board of directors, including a majority of our independent directors, approved the Company becoming subject to a minimum asset coverage ratio of 150%. The 150% asset coverage ratio became effective on April 16, 2019. See “Business Development Company Regulations” in Part I, Item 1 of this Annual Report and “Risk Factors—Risks Related to Our Business and Structure—Effective April 16, 2019, our asset coverage requirement was reduced from 200% to 150%, which could increase the risk of investing in the Company” in Part I, Item 1A of this Annual Report.

 

(7) “Other expenses” are based on estimated amounts for the current fiscal year and include our overhead expenses, including payments under our administration agreement based on our allocable portion of overhead and other expenses incurred by Saratoga Investment Advisors in performing its obligations under the administration agreement. See “Administration Agreement.”

 

(8) This figure includes all of the fees and expenses of our wholly owned subsidiaries, Saratoga Investment Corp SBIC LP, Saratoga Investment Corp SBIC II LP, Saratoga Investment Corp SBIC III LP, Saratoga Investment Funding LLC and Saratoga Investment Funding II LLC, except SLF JV.  As SLF JV is structured as a private joint venture, with control and management shared equally between us and TJHA, no management fees are paid by SLF JV.  Furthermore, this table reflects all of the fees and expenses borne by us with respect to our investment in Saratoga CLO.  

 

Example

 

The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical $1,000 investment in our common stock, assuming an asset coverage ratio of 165.9% (the Company’s actual asset coverage as of February 28, 2023) and total annual expenses of 18.52% of net assets attributable to common stock as set forth in the fees and expenses table above, and (x) a 5.0% annual return resulting entirely from net realized capital gains (none of which is subject to the incentive fee) and (y) a 5.0% annual return resulting entirely from net realized capital gains (all of which is subject to the incentive fee based on capital gains). Transaction expenses are included in the following example. This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including cost of debt, if any, and other expenses) may be greater or less than those shown.

 

   1 Year   3 Years   5 years   10 years 
Assuming a 5% annual return on portfolio resulting entirely from net realized capital gains (none of which is subject to the capital gains incentive fee)(1)  $190   $598   $1,049   $2,388 
Assuming a 5% annual return resulting entirely from net realized capital gains (all of which is subject to incentive fee based on capital gains)(2)  $200   $630   $1,104   $2,513 

 

 

(1) Assumes that we will not realize any capital gains computed net of all realized capital losses and unrealized capital depreciation.

 

(2) Assumes no unrealized capital depreciation and a 5% annual return resulting entirely from net realized capital gains and therefore subject to the incentive fee based on capital gains. Because our investment strategy involves investments that generate primarily current income, we believe that a 5% annual return resulting entirely from net realized capital gains is unlikely.

 

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This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.

 

The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. Both examples assume that the 5% annual return will be generated entirely through net realized capital gains and, as a result, will trigger the payment of the capital gains portion of the incentive fee under the investment advisory agreement. Any potential income portion of the incentive fee under the investment advisory agreement is not included in the example. If we achieve sufficient returns on our investments, including through net realized capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. In addition, while the example assumes reinvestment of all dividends and distributions at NAV, under certain circumstances, reinvestment of dividends and other distributions under our dividend reinvestment plan may occur at a price per share that differs from NAV.

 

Sales of unregistered securities

 

On July 9, 2020, the Company issued $5.0 million aggregate principal amount of our 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% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.75% per year. The 7.75% 2025 Notes 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% 2025 Notes have been capitalized and are being amortized over the term of the Notes. As of February 28, 2023, the total 7.25% 2025 Notes outstanding was $5.0 million. The 7.75% 2025 Notes are unlisted and have a par value of $25.00 per note.

 

At February 28, 2023, the total 7.75% 2025 Notes outstanding was $5.0 million.

 

On December 29, 2020, the Company issued $5.0 million aggregate principal amount of our 6.25% 2027 Notes. Offering costs incurred were approximately $0.1 million. Interest on the 6.25% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year. The 6.25% 2027 Notes mature on December 29, 2027 and may be redeemed in whole or in part at any time or from time to time at our option, on or after December 29, 2024. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.1 million related to the 6.25% 2027 Notes have been capitalized and are being amortized over the term of the Notes. The 6.25% 2027 Notes are unlisted and have a par value of $25.00 per note.

 

On January 28, 2021, the Company issued $10.0 million aggregate principal amount of our 6.25% 2027 Notes (the “Second 6.25% 2027 Notes”) for net proceeds of $9.7 million after deducting underwriting commissions of approximately $0.3 million. Offering costs incurred were approximately $0.1 million. Interest on the Second 6.25% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year. The Second 6.25% 2027 Notes mature on January 28, 2027 and commencing January 28, 2023, 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 $0.4 million related to the Second 6.25% 2027 Notes have been capitalized and are being amortized over the term of the Notes. The Second 6.25% 2027 Notes are unlisted and have a par value of $25.00 per note.

 

At February 28, 2023, the total 6.25% 2027 Notes outstanding was $15.0 million.

 

On September 8, 2022, the Company issued $12.0 million in aggregate principal amount of our 7.00% 2025 Notes for net proceeds of $11.6 million after deducting customary fees and offering expenses of approximately $0.4 million. Interest on the 7.00% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.00% per year. The 7.00% 2025 Notes mature on September 8, 2025 and commencing September 8, 2024, 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 $0.05 million related to the 7.00% 2025 Notes have been capitalized and are being amortized over the term of the 7.00% 2025 Notes.

 

At February 28, 2023, the carrying amount of the 7.00% 2025 Notes was $12.0 million.

 

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Issuer purchases of equity securities

 

During the year ended February 28, 2023, February 28, 2022 and February 28, 2021, we purchased 438,192, 99,623 and 190,321 shares, respectfully of our common stock in the open market.

 

The following table summarizes the purchased common stock on a month to month basis for the year ended February 28, 2023:

 

Period  Quantity 
March 1, 2022 through March 31, 2022   33,164 
April 1, 2022 through April 30, 2022   16,836 
May 1, 2022 through May 31, 2022   92,177 
June 1, 2022 through June 30, 2022   84,790 
July 1, 2022 through July 31, 2022   65,970 
August 1, 2022 through  August 31, 2022   2,590 
September 1, 2022 through September 31, 2022   73,632 
October 1, 2022 through October 31, 2022   20,239 
November 1, 2022 through November 30, 2022   200 
December 1, 2022 through December 31, 2022   43,104 
January 1, 2023 through January 31, 2023   5,490 
February 1, 2023 through February 28, 2023   - 
Total   438,192 

 

[ITEM 6. - Reserved]

 

ITEM 7. 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 Annual Report on Form 10-K. In addition to historical information, the following discussion and other parts of this Annual 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 Part I. Item 1A. “Risk Factors” and “Note about Forward-Looking Statements” appearing elsewhere herein.

 

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 Annual Report on Form 10-K involve risks and uncertainties, including statements as to:

 

  our future operating results;

 

  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;

 

  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 operational and financial performance of our portfolio companies, including their ability to achieve our respective objectives as a result of the current economic conditions caused by, among other things, the COVID-19 pandemic, elevated levels of inflation, and a rising interest rate environment, and the effects of the disruptions caused thereby on our ability to continue to effectively manage our business;

 

  the impact of investments that we expect to make and future acquisitions and divestitures;

 

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  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;

 

  the ability of our portfolio companies to achieve their objectives;

 

  our expected financings and investments;

 

  our regulatory structure and tax treatment, 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;

 

  the impact of interest rate volatility, including the decommissioning of LIBOR, on our results, particularly because we use leverage as part of our investment strategy;
     
  the impact of supply chain constraints and labor difficulties on our portfolio companies and the global economy;
     
  the elevated level of inflation, and its impact on our portfolio companies and on the industries in which we invest;

 

  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.

 

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 Annual Report on Form 10-K on information available to us on the date of this Annual Report on Form 10-K, 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 U.S. Securities and Exchange Commission (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 annual report on Form 10-K.

 

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OVERVIEW

 

We are a Maryland corporation that has elected to be treated as a BDC under the Investment Company Act of 1940, as amended (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 Internal Revenue Code of 1986, as amended (the “Code”).

 

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.

 

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 Madison 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 Madison 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.

 

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.

 

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 (the “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. On September 29, 2022, the Company’s wholly owned subsidiary, SBIC III 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 New York Stock Exchange (the “NYSE”) under the trading symbol “SAQ” with a par value of $25.00 per note. The 2020 Notes were redeemed in full on January 13, 2017 and are no longer listed on the NYSE.

 

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 (the “Share Repurchase Plan”). On October 7, 2015, our board of directors extended the Share Repurchase Plan for another year and increased the number of shares the Company was 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, our board of directors extended the Share Repurchase Plan for another year to October 15, 2017 and increased the number of shares the Company was 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, our board of directors extended the 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 the Company was permitted to repurchase unchanged at 600,000 shares of its common stock. On May 4, 2020, our board of directors increased the Share Repurchase Plan to permit the Company to repurchase 1.3 million shares of its common stock. On January 5, 2021, our board of directors extended the Share Repurchase Plan for another year to January 15, 2022, leaving the number of shares the Company was permitted to repurchase unchanged at 1.3 million shares of common stock. On January 4, 2022, our board of directors extended the Shares Repurchase Plan for another year to January 15, 2023, leaving the number of shares the Company is permitted to repurchase unchanged at 1.3 million shares of common stock. As of February 28, 2023, the Company purchased 946,627 shares of common stock, at the average price of $21.83 for approximately $20.7 million pursuant to the Share Repurchase Plan. During the three months ended February 28, 2023 the Company purchased 48,594 shares of common stock, at the average price $25.19 for approximately $1.2 million pursuant to the Share Repurchase Plan. During the year ended February 28, 2023, the Company purchased 438,192 shares of common stock, at the average price $24.70 for approximately $10.8 million pursuant to the Share Repurchase Plan

 

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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 units of the 2022 Notes 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 “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 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 note. 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 and are no longer listed on the NYSE.

 

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, we amended our equity distribution agreement to add BB&T Capital Markets and B. Riley FBR, Inc. as sales agents in our ATM offering. 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 February 28, 2021, we 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). This equity distribution agreement was terminated as of July 29, 2021 and, as of that date, we 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).

 

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.

 

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. 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 were amortized over the term of the 6.25% 2025 Notes.

 

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 and $20.0 million CLO 2013-1 Warehouse Loan were repaid. 

 

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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.

 

On August 31, 2021, the Company redeemed $60.0 million in aggregate principal amount of issued and outstanding 6.25% 2025 Notes at par ($25 per note) and the 6.25% 2025 Notes are no longer listed on the NYSE.

 

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. SBIC II LP’s SBIC license provides up to $175.0 million in additional long-term capital in the form of SBA debentures.    

 

On June 24, 2020, the Company issued $37.5 million 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% 2025 Notes. Net proceeds to the Company were $5.4 million after deducting underwriting commissions of approximately $0.2 million. 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 were amortized over the term of the 7.25% 2025 Notes. On July 14, 2022, the 7.25% 2025 Notes were redeemed and are no longer listed on the NYSE.

  

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% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.75% per year. The 7.75% 2025 Notes 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, subject to a fee depending on the date of repayment. 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% 2025 Notes have been capitalized and are being amortized over the term of the Notes. As of February 28, 2023, the total 7.75% 2025 Notes outstanding was $5.0 million. The 7.75% 2025 Notes are not listed and have a par value of $25.00 per note.

 

On December 29, 2020, the Company issued $5.0 million aggregate principal amount of our 6.25% fixed-rate Notes due in 2027 (the “6.25% 2027 Notes”).  Offering costs incurred were approximately $0.1 million.  Interest on the 6.25% 2027 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 February 28, 2021. The 6.25% 2027 Notes mature on December 29, 2027 and may be redeemed in whole or in part at any time or from time to time at our option, on or after December 29, 2024. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.1 million related to the 6.25% 2027 Notes have been capitalized and are being amortized over the term of the Notes. The 6.25% 2027 Notes are not listed and have a par value of $25.00 per note.

 

On January 28, 2021, the Company issued $10.0 million aggregate principal amount of our 6.25% fixed rate Notes due in 2027 (the “Second 6.25% 2027 Notes”) for net proceeds of $9.7 million after deducting underwriting commissions of approximately $0.3 million. Offering costs incurred were approximately $0.1 million. Interest on the Second 6.25% 2027 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 February 28, 2021. The Second 6.25% 2027 Notes mature on January 28, 2027 and commencing January 28, 2023, 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 $0.4 million related to the Second 6.25% 2027 Notes have been capitalized and are being amortized over the term of the Notes. The Second 6.25% 2027 Notes are not listed and have a par value of $25.00 per note.

 

On February 26, 2021, the Company completed the fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024, and extended its legal maturity to April 2033. A non-call period ending February 2022 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. At August 31, 2021, the outstanding receivable of $2.6 million was repaid.

 

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On March 10, 2021, the Company issued $50.0 million aggregate principal amount of our 4.375% fixed-rate Notes due in 2026 (the “4.375% 2026 Notes”) for net proceeds of $49.0 million after deducting underwriting commissions of approximately $1.0 million. Offering costs incurred were approximately $0.3 million. Interest on the4.375% 2026 Notes is paid semi-annually in arrears on February 28 and August 28, at a rate of 4.375% per year, beginning August 28, 2021. The 4.375% 2026 Notes mature on February 28, 2026 and may be redeemed in whole or in part at any time on or after November 28, 2025 at par plus a “make-whole” premium, and thereafter at par. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.3 million related to the 4.375% 2026 Notes have been capitalized and are being amortized over the term of the Notes.

   

On July 15, 2021, the Company issued an additional $125.0 million aggregate principal amount of the Company’s 4.375% 2026 Notes (the “Additional 4.375% 2026 Notes”) for net proceeds for approximately $123.5 million, based on the public offering price of 101.00% of the aggregate principal amount of the Additional 4.375% 2026 Notes, after deducting the underwriting discount of $2.5 million and the offering expenses of approximately $0.2 million payable by the Company. The net proceeds from the offering were used redeem all of the outstanding 6.25% 2025 Notes (as described above), and for general corporate purposes in accordance with our investment objective and strategies. The Additional 4.375% 2026 Notes were treated as a single series with the existing 4.375% 2026 Notes under the indenture and had the same terms as the existing 4.375% 2026 Notes.

 

On July 30, 2021, we entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc. and Compass Point Research and Trading, LLC, each as agents (the “Agents”), through which we may offer for sale, from time to time, up to $150.0 million of our common stock through the Agents, or to them, as principal for their account. As February 28, 2023, the Company sold 4,840,361 shares for gross proceeds of $123.9 million at an average price of $25.61 for aggregate net proceeds of $122.4 million (net of transaction costs). For the year ended February 28, 2023, there was no activity related to the ATM offerings

 

On August 9, 2021, the Company exchanged its existing $17.9 million Class F-R-3 Notes for $8.5 million Class F-1-R-3 Notes and $9.4 million Class F-2-R-3 Notes at par. On August 11, 2021, the Company sold its Class F-1-R-3 Notes to third parties, resulting in a realized loss of $0.1 million.

 

The Company has formed a wholly owned special purpose entity, Saratoga Investment Funding II LLC, a Delaware limited liability company (“SIF II”), for the purpose of entering into a $50.0 million senior secured revolving credit facility with Encina Lender Finance, LLC (the “Lender”), supported by loans held by SIF II and pledged to the Lender under the credit facility (the “Encina Credit Facility). The Encina Credit Facility closed on October 4, 2021. During the first two years following the closing date, SIF II may request an increase in the commitment amount under the Encina Credit Facility to up to $75.0 million. The terms of the Encina Credit Facility require a minimum drawn amount of $12.5 million at all times during the first six months following the closing date, which increases to the greater of $25.0 million or 50% of the commitment amount in effect at any time thereafter. The term of the Encina Credit Facility is three years. Advances under the Encina Credit Facility bear interest at a floating rate per annum equal to LIBOR plus 4.0%, with LIBOR having a floor of 0.75%, with customary provisions related to the selection by the Lender and the Company of a replacement benchmark rate. Concurrently with the closing of the Encina Credit Facility, all remaining amounts outstanding on the Company’s existing revolving credit facility with Madison Capital Funding, LLC were repaid and the facility terminated. On January 27, 2023, among other things, the borrowings available under the Encina Credit Facility was increased from up to $50.0 million to up to $65.0 million, the underlying benchmark rate used to compute interest changed from LIBOR to Term SOFR for one-month tenor plus a 0.10% credit spread adjustment; the applicable effective margin rate on borrowings increased from 4.00% to 4.25% and the maturity date was extended from October 4, 2024 to January 27, 2026.

 

On October 26, 2021, the Company and TJHA JV I LLC (“TJHA”) entered into a Limited Liability Company Agreement to co-manage Saratoga Senior Loan Fund I JV LLC (“SLF JV”). SLF JV is invested in Saratoga Investment Corp Senior Loan Fund 2021-1 Ltd (“SLF 2021”), which is a wholly owned subsidiary of SLF JV. SLF 2021 was formed for the purpose of making investments in a diversified portfolio of broadly syndicated first lien and second lien term loans or bonds in the primary and secondary markets.

 

On September 30, 2022, SLF 2021 was renamed to Saratoga Investment Corp Senior Loan Fund 2022-1, Ltd. (“SLF 2022”).

 

The Company and TJHA have equal voting interest on all material decisions with respect to SLF JV, including those involving its investment portfolio, and equal control of corporate governance. No management fee is charged to SLF JV as control and management of SLF JV is shared equally.

 

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The Company and TJHA have committed to provide up to a combined $50.0 million of financing to SLF JV through cash contributions, with the Company providing $43.75 million and TJHA providing $6.25 million, resulting in an 87.5% and 12.5% ownership between the two parties. The financing is issued in the form of an unsecured note and equity. The unsecured note will pay a fixed rate of 10.0% per annum and is due and payable in full on June 15, 2023. As of February 28, 2023, the Company and TJHA’s investment in SLF JV consisted of an unsecured note of $17.6 million and $2.5 million, respectively; and membership interest of $17.6 million and $2.5 million, respectively. As of February 28, 2022, the Company and TJHA’s investment in SLF JV consisted of an unsecured note of $13.1 million and $1.9 million, respectively; and membership interest of $13.1 million and $1.9 million, respectively. As of February 28, 2023, and February 28, 2022, the Company’s investment in the unsecured note of SLF JV had a fair value of $17.6 million and $13.1 million, respectively, and the Company’s investment in the membership interests of SLF JV had a fair value of $13.1 million and $12.0 million, respectively.

 

For the years ended February 28, 2023 and 2022, the Company earned approximately $1.5 million and 0.1 million of interest income, respectively, related to SLF JV, which is included in interest income. As of February 28, 2023 and 2022, approximately $0.04 million and $0.1 million, respectively, of interest income related to SLF JV was included in interest receivable.

 

SLF JV’s initial investment in SLF 2022 was in the form of an unsecured loan. The unsecured note paid a fixed rate of 10.00% per annum and is due and payable in full on June 15, 2023. The unsecured loan was repaid in full on October 28, 2022, as part of the CLO closing.

 

The Company has determined that SLF JV is an investment company under (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services—Investment Companies; however, in accordance with such guidance the Company will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary. SLF JV is not a wholly owned investment company subsidiary as the Company and TJHA each have an equal 50% voting interest in SLF JV and thus neither party has a controlling financial interest. Furthermore, ASC Topic810, Consolidation, concludes that in a joint venture where both members have equal decision making authority, it is not appropriate for one member to consolidate the joint venture since neither has control. Accordingly, the Company does not consolidate SLF JV.

 

On January 19, 2022, the Company issued $75.0 million aggregate principal amount of our 4.35% fixed-rate Notes due in 2027 (the “4.35% 2027 Notes”) for net proceeds of $73.0 million, based on the public offering price of 99.317% of the aggregate principal amount of the 4.35% 2027 Notes, after deducting the underwriting commissions of approximately $1.5 million. Offering costs incurred were approximately $0.3 million.  Interest on the 4.35% 2027 Notes is paid semi-annually in arrears on February 28 and August 28, at a rate of 4.35% per year, beginning August 28, 2022. The 4.35% 2027 Notes mature on February 28, 2027 and may be redeemed in whole or in part at the Company’s option at any time prior to November 28, 2026, at par plus a “make-whole” premium, and thereafter at par. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.8 million related to the 4.35% 2027 Notes have been capitalized and are being amortized over the term of the Notes.

 

On April 27, 2022, the Company issued $87.5 million aggregate principal amount of our 6.00% fixed-rate notes due 2027 (the “6.00% 2027 Notes”) for net proceeds of $84.8 million after deducting underwriting commissions of approximately $2.7 million. Offering costs incurred were approximately $0.1 million. On May 10, 2022, the underwriters partially exercised their option to purchase an additional $10.0 million in aggregate principal amount of the 6.00% 2027 Notes. Net proceeds to the Company were $9.7 million after deducting underwriting commissions of approximately $0.3 million. Interest on the 6.00% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.00% per year. The 6.00% 2027 Notes mature on April 30, 2027 and commencing April 27, 2024, 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 $3.5 million related to the 6.00% 2027 Notes have been capitalized and are being amortized over the term of the 6.00% 2027 Notes. The 6.00% 2027 Notes are listed on the NYSE under the trading symbol “SAT” with a par value of $25.00 per note.

 

On August 15, 2022, the Company issued an additional $8.0 million in aggregate principal amount of the 6.00% 2027 Notes (the “Additional 6.00% 2027 Notes”) for net proceeds of $7.8 million, based on the public offering price of 97.80% of the aggregate principal amount of the 6.00% 2027 Notes. The Additional 6.00% 2027 Notes are treated as a single series with the existing 6.00% 2027 Notes under the indenture and had the same terms as the existing 6.00% 2027 Notes. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Additional offering costs incurred were approximately $0.2 million. Additional financing costs of $0.2 million related to the 6.00% 2027 Notes have been capitalized and are being amortized over the term of the 6.00% 2027 Notes.

 

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On September 8, 2022, the Company issued $12.0 million in aggregate principal amount of our 7.00% fixed-rate notes due 2025 (the “7.00% 2025 Notes”) for net proceeds of $11.6 million after deducting customary fees and offering expenses of approximately $0.4 million. Interest on the 7.00% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.00% per year. The 7.00% 2025 Notes mature on September 8, 2025 and commencing September 8, 2024, may be redeemed in whole or in part at any time or from time to time at our option. We expect to use the net proceeds from this offering to make investments in middle-market companies (including investments made through our SBIC subsidiaries) in accordance with our investment objective and strategies and for general corporate purposes. Financing costs of $0.05 million related to the 7.00% 2025 Notes have been capitalized and are being amortized over the term of the 7.00% 2025 Notes.

 

On September 29, 2022, the Company’s wholly owned subsidiary, SBIC III LP, also received an SBIC license from the SBA. SBIC III LP’s SBIC license provides up to $175.0 million in additional long-term capital in the form of SBA debentures.    

 

On October 27, 2022, the Company issued $40.0 million in aggregate principal amount of our 8.00% fixed-rate notes due 2027 (the “8.00% 2027 Notes”) for net proceeds of $38.7 million after deducting underwriting commissions of approximately $1.3 million. Offering costs incurred were approximately $0.2 million. On November 10, 2022, the underwriters partially exercised their option to purchase an additional $6.0 million in aggregate principal amount of the 8.00% 2027 Notes. Net proceeds to the Company were $5.8 million after deducting underwriting commissions of approximately $0.2 million. Interest on the 8.00% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 8.00% per year, beginning February 28, 2023. The 8.00% 2027 Notes mature on October 31, 2027 and commencing October 27, 2024, 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 $1.7 million related to the 8.00% 2027 Notes have been capitalized and are being amortized over the term of the 8.00% 2027 Notes. The 8.00% 2027 Notes are listed on the NYSE under the trading symbol “SAJ” with a par value of $25.00 per note.

 

On October 28, 2022, SLF 2022 issued $402.1 million of debt through the JV CLO trust. The 2022 JV CLO Notes were issued pursuant to the JV Indenture, with the Trustee. As part of the transaction, the Company purchased 87.50% of the Class E Notes from SLF 2022 with a par value of $12.25 million. As of February 28, 2023 and February 28, 2022, the fair value of these Class E Notes were $11.4 million and $0.0 million, respectively.

 

On December 13, 2022, the Company issued $52.5 million in aggregate principal amount of our 8.125% fixed-rate notes due 2027 (the “8.125% 2027 Notes”) for net proceeds of $50.8 million after deducting underwriting commissions of approximately $1.6 million. Offering costs incurred were approximately $0.1 million. On December 21, 2022, the underwriters fully exercised their option to purchase an additional $7.875 million in aggregate principal amount of the 8.125% 2027 Notes. Net proceeds to the Company were $7.6 million after deducting underwriting commissions of approximately $0.2 million. Interest on the 8.125% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 8.125% per year, beginning February 28, 2023. The 8.125% 2027 Notes mature on December 31, 2027 and commencing December 13, 2024, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from this offering were used to make investments in middle-market companies (including investments made through our SBIC subsidiaries) in accordance with our investment objective and strategies and for general corporate purposes. Financing costs of $2.0 million related to the 8.125% 2027 Notes have been capitalized and are being amortized over the term of the 8.125% 2027 Notes. The 8.125% 2027 Notes are listed on the NYSE under the trading symbol “SAY” with a par value of $25.00 per note.

  

Critical Accounting Policies and Estimates

 

Basis of Presentation

 

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 and estimates follows.

 

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Investment Valuation

 

The Company accounts for its investments at fair value in accordance with the Financial Accounting Standards Board ASC Topic 820, Fair Value Measurements 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 of our board of directors and a third party independent valuation firm. We use multiple techniques for determining fair value based on the nature of the investment and experience with those types of investments and specific portfolio companies. The selections of the valuation techniques and the inputs and assumptions used within those techniques often require subjective judgements and estimates. These techniques include market comparables, discounted cash flows and enterprise value waterfalls. Fair value is best expressed as a range of values from which the Company determines a single best estimate. The types of inputs and assumptions that may be considered in determining the range of values of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis and volatility in future interest rates, call and put features, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flows 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-2-R-3 Notes tranche of the Saratoga CLO every quarter.

 

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 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 flows 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 market comparables 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 flows, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The cash flows use a set of inputs including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated valuations. The inputs 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.

 

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In December 2020, the U.S. Securities and Exchange Commission (the “SEC”) adopted new Rule 2a-5 under the 1940 Act (“Rule 2a-5”) that establishes a regulatory framework for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits boards, subject to board oversight and certain other conditions, to designate the investment adviser to perform fair value determinations. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must determine the fair value of a security. The SEC also adopted new Rule 31a-4 under the 1940 Act (“Rule 31a-4”), that provides the recordkeeping requirements associated with fair value determinations. Finally, the SEC rescinded previously issued guidance on related issues, including the role of the board in determining fair value and the accounting and auditing of fund investments. Rule 2a-5 and Rule 31a-4 became effective on March 8, 2021, and had a compliance date of September 8, 2022. While our board of directors has not elected to designate Saratoga Investment Advisors as the valuation designee, the Company has adopted certain revisions to its valuation policies and procedures in order comply with the applicable requirements of Rule 2a-5 and Rule 31a-4.

    

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.

 

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. 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, amendment, redemption 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.

 

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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 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, we also redeemed our existing $4.5 million aggregate amount of the Class F notes tranche at par and the $20.0 million CLO 2013-1 Warehouse Loan was repaid.

 

On February 11, 2020, we 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. On October 23, 2020, the availability under the CLO 2013-1 Warehouse 2 Loan was increased to $25.0 million, which was immediately fully drawn and, which expires on August 20, 2021. The interest rate was also amended to be based on a pricing grid, starting at an annual rate of 3M USD LIBOR + 4.46%. During the fourth quarter ended February 28, 2021, the CLO 2013-1 Warehouse 2 Ltd was repaid in full.

 

On February 26, 2021, the Company completed the fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024, and extended its legal maturity to April 2033. A non-call period ended February 2022 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million of the CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. At August 31, 2021, the outstanding receivable of $2.6 million was repaid in full.

 

On August 9, 2021, the Company exchanged its existing $17.9 million Class F-R-3 Notes for $8.5 million Class F-1-R-3 Notes and $9.4 million Class F-2-R-3 Notes at par. On August 11, 2021, the Company sold its Class F-1-R-3 Notes to third parties, resulting in a realized loss of $0.1 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%.

 

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 directors who are not “interested persons” (as defined in Section 2(a)(19) of the 1940 Act) of the Company (“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 (“NAV”) (including the cost and expenses of any independent valuation firm);

 

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  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;

 

  U.S. 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)).

 

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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 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 the 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 Annual 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.

 

Capital Gains Incentive Fee

 

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.

 

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Recent Accounting Pronouncements

 

In June 2022, the FASB issued Accounting Standards Update (“ASU”) No. 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (Topic 820),” which clarifies that a contractual sale restriction prohibiting the sale of an equity security is a characteristic of the reporting entity holding the equity security and is not included in the equity security’s unit of account. Accordingly, an entity should not consider the contractual sale restriction when measuring the equity security’s fair value. In addition, ASU No. 2022-03 prohibits an entity from recognizing a contractual sale restriction as a separate unit of account. ASU No. 2022-03’s amendments are effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU No. 2022-03 on its consolidated financial statements.

 

In March 2020, the FASB issued “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”) to provide optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 established Topic 848 to provide relief during the temporary transition period and includes a sunset provision based on expectations of when the London Interbank Offered Rate (“LIBOR”) would cease being published. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which deferred the sunset day of this guidance to December 31, 2024. With the adoption of ASU 2022-06, there was no significant impact to the Company’s consolidated financial position.

 

Portfolio and investment activity

 

Investment Portfolio Overview

 

    

February 28,
2023

 

   

February 28,
2022

 

   

February 28,
2021

 
    

($ in millions)

 
Number of investments(1)   115    94    81 
Number of portfolio companies(2)   49    45    40 
Average investment per portfolio company(2)  $19.0   $17.3   $12.6 
Average investment size(1)  $8.3   $8.4   $6.5 
Weighted average maturity(3)   2.9 yrs    2.9 yrs    3.2 yrs 
Number of industries(5)   40    38    31 
Non-performing or delinquent investments (fair value)  $9.8   $-   $2.1 
Fixed rate debt (% of interest earning portfolio)(3)  $8.2(1.0)%  $16.9(2.5)%  $23.3(4.8)%
Fixed rate debt (weighted average current coupon)(3)   12.2%   10.0%   9.8%
Floating rate debt (% of interest earning portfolio)(3)  $817.1(99.0)%  $671.2(97.5)%  $462.6(95.2)%
Floating rate debt (weighted average current spread over LIBOR)(3)(4)   7.0%   7.1%   7.4%

 

 

(1) Excludes our investment in the subordinated notes of Saratoga CLO.
   
(2) At February 28, 2023, excludes our investment in the subordinated notes of Saratoga CLO and Class F-2-R-3 Notes tranche, as well as the unsecured notes and equity interests in the SLF JV and the Class E Note tranche of the SLF 2022. At February 28, 2022, excludes our investment in the subordinated notes of Saratoga CLO, Class F-2-R-3 Notes tranche, as well as the unsecured notes and equity interests in the SLF JV. At February 28, 2021, excludes our investment in the subordinated notes of Saratoga CLO and Class F-R-3 Note tranche of Saratoga CLO.
   
(3) Excludes our investment in the subordinated notes of Saratoga CLO and equity interests, as well as the unsecured notes and equity interests in SLF JV and the Class E Note tranche of the SLF 2022.
   
(4) Calculation uses either 1-month or 3-month LIBOR, depending on the contractual terms, and after factoring in any existing LIBOR floors.

 

(5) Our investment in the subordinated notes of Saratoga CLO and Class F-R-3 Note tranche, as well as the unsecured notes and equity interests in the SLF JV and the Class E note tranche of the SLF 2022 are included in Structured Finance Securities industry.

 

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During the fiscal year ended February 28, 2023, we invested $385.1 million in new and existing portfolio companies and had $222.2 million in aggregate amount of exits and repayments resulting in net investments of $162.9 million for the year.

 

During the fiscal year ended February 28, 2022, we invested $458.1 million in new and existing portfolio companies and had $226.9 million in aggregate amount of exits and repayments resulting in net investments of $231.1 million for the year.

 

During the fiscal year ended February 28, 2021, we invested $202.3 million in new and existing portfolio companies and had $130.3 million in aggregate amount of exits and repayments resulting in net investments of $72.0 million for the year.

 

Portfolio Composition

 

Our portfolio composition at February 28, 2023, February 28, 2022 and February 28, 2021 at fair value was as follows:

 

    

February 28, 2023

    

February 28, 2022

    

February 28, 2021

 
    Percentage
of Total
Portfolio
    

Weighted
Average
Current
Yield

    

Percentage
of Total
Portfolio

    

Weighted
Average
Current
Yield

    

Percentage
of Total
Portfolio

    

Weighted
Average
Current
Yield

 
First lien term loans   82.1%   12.3%   77.3%   8.3%   79.5%   9.5%
Second lien term loans   1.5    5.3    5.4    11.1    4.4    12.3 
Unsecured loans   2.1    9.8    1.9    9.7    0.4    - 
Structured finance securities   4.3    7.4    4.7    10.5    9.0    11.6 
Equity interests   10.0    -    10.7    -    6.7    - 
Total   100.0%   10.7%   100.0%   7.7%   100.0%   9.1%

 

At February 28, 2023, our investment in the subordinated notes of Saratoga CLO, a collateralized loan obligation fund, had a fair value of $21.2 million and constituted 2.2% of our portfolio. This investment constitutes a first loss position in a portfolio that, as of February 28, 2023 and February 28, 2022, was composed of $658.0 million and $660.2 million, respectively, in aggregate principal amount of primarily senior secured first lien term loans. In addition, as of February 28, 2023, we also own $8.8 million in aggregate principal of the F-2-R-3 Notes in the Saratoga CLO, which only rank senior to the subordinated notes.

  

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”). 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 February 28, 2023, $544.4 million or 89.8% of the Saratoga CLO portfolio investments in terms of market value had a CMR color rating of green or yellow and two Saratoga CLO portfolio investments were in default with a fair value of $2.8 million. At February 28, 2022, $630.3 million or 98.7% of the Saratoga CLO portfolio investments in terms of market value had a CMR color rating of green or yellow and two Saratoga CLO portfolio investments were in default with a fair value of $2.8 million. For more information relating to Saratoga CLO, see the audited financial statements for Saratoga CLO included elsewhere herein.

 

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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.

 

Portfolio CMR distribution

 

The CMR distribution of our investments at February 28, 2023 and February 28, 2022 was as follows:

 

Saratoga Investment Corp.

 

   February 28, 2023   February 28, 2022 
Color Score  Investments at Fair Value   Percentage of Total Portfolio   Investments at Fair Value   Percentage of Total Portfolio 
   ($ in thousands)   
Green  $808,791    83.2%  $690,672    84.5%
Yellow   34,172    3.5    10,593    1.3 
Red   -    0.0    -    0.0 
N/A(1)   129,627    13.3    116,302    14.2 
Total  $972,590    100.0%  $817,567    100.0%

 

 

(1)Comprised of our investment in the subordinated notes of Saratoga CLO and equity interests.

 

The change in reserve from $0.0 million as of February 28, 2022 to $0.0 million as of February 28, 2023 was primarily related to the non-accrual of interest income related to our investment in Knowland Group.

 

The CMR distribution of Saratoga CLO investments at February 28, 2023 and February 28, 2022 was as follows:

 

Saratoga CLO

 

   February 28, 2023   February 28, 2022 
Color Score  Investments at Fair Value   Percentage of Total Portfolio   Investments at Fair Value   Percentage of Total Portfolio 
   ($ in thousands) 
Green  $544,424    89.9%  $595,324    93.2%
Yellow   40,812    6.7    34,983    5.5 
Red   20,718    3.4    8,622    1.3 
N/A(1)   0    0.0    34    0.0 
Total  $605,954    100.0%  $638,963    100.0%

 

 

(1)Comprised of Saratoga CLO’s equity interests.

 

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Portfolio composition by industry grouping at fair value

 

The following table shows our portfolio composition by industry grouping at fair value at February 28, 2023 and February 28, 2022:

 

Saratoga Investment Corp.

 

   February 28, 2023   February 28, 2022 
   Investments
At
Fair Value
   Percentage
of Total
Portfolio
   Investments
At
Fair Value
   Percentage
of Total
Portfolio
 
   ($ in thousands) 
Healthcare Software   $119,124    12.2%  $90,126    11.0%
IT Services   87,167    9.0    80,804    9.9 
Consumer Services    63,642    6.6    38,234    4.7 
HVAC Services and Sales   54,450    5.6    29,976    3.7 
Real Estate Services    53,406    5.5    53,506    6.6 
Education Software   44,955    4.6    33,656    4.1 
Structured Finance Securities (1)   41,363    4.4    

38,030

    

4.7

 
Hospitality/Hotel   37,972    3.9    19,925    2.4 
Education Services    34,489    3.5    35,309    4.3 
Investment Fund   30,726    3.2    25,140    3.1 
Sports Management    26,711    2.7    26,654    3.3 
Healthcare Services   26,286    2.7    42,054    5.1 
Financial Services    26,218    2.7    23,540    2.9 
Talent Acquisition Software   25,999    2.7    19,652    2.4 
Direct Selling Software    25,771    2.7           
Restaurant   24,826    2.6    15,686    1.9 
Specialty Food Retailer    24,411    2.5    34,013    4.2 
Mentoring Software   21,359    2.2    18,321    2.2 
Legal Software    20,699    2.1    7,425    0.9 
Marketing Orchestration Software   18,715    1.9    28,777    3.5 
Mental Healthcare Services    16,922    1.7    -    0.0 
Insurance Software   16,761    1.7    10,921    1.3 
Corporate Education Software    15,254    1.6    -    0.0 
Non-profit Services   13,095    1.3    10,039    1.2 
Employee Collaboration Software    13,052    1.3    10,000    1.2 
Lead Management Software   12,090    1.2    -    0.0 
Dental Practice Management    11,151    1.1    8,403    1.0 
Research Software   10,677    1.1    -    0.0 
Alternative Investment Management Software   10,459    1.1    -    0.0 
Field Service Management   9,958    1.0    6,981    0.9 
Industrial Products    9,608    1.0    8,427    1.0 
Financial Services Software   9,096    0.9    5,940    0.7 
Office Supplies    6,373    0.7    3,726    0.5 
Corporate Education Software   3,809    0.4    3,306    0.4 
Cyber Security    2,509    0.3    1,636    0.2 
Staffing Services   2,079    0.2    1,912    0.2 
Dental Practice Management    1,000    0.1    -    0.0 
Facilities Maintenance   408    0.0    482    0.1 
Dental Practice Management Software   -    0.0    35,038    4.3 
Marketing Services    -    0.0    17,327    2.1 
Payroll Services   -    0.0    17,000    2.1 
Waste Services    -    0.0    9,000    1.1 
Healthcare Supply   -    0.0    5,194    0.6 
Healthcare Products Manufacturing   -    0.0    714    0.1 
Consumer Products   -    0.0    693    0.1 
Total  $972,590    100.0%  $817,567    100.0%

 

 

(1)As of February 28, 2023, comprised of our investment in the subordinated notes and F-2-R-3 Notes of Saratoga CLO, as well as the unsecured notes and equity interests in the SLF JV and E-Notes of SLF 2022. As of February 28, 2022, comprised of our investment in the subordinated notes and Class F-2-R-3 Notes of Saratoga CLO, as well as the unsecured notes and equity interests in the SLF JV.

 

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The following table shows Saratoga CLO’s portfolio composition by industry grouping at fair value at February 28, 2023 and February 28, 2022:

 

Saratoga CLO

 

   February 28, 2023   February 28, 2022 
   Investments
at
Fair Value
   Percentage
of Total
Portfolio
   Investments
at
Fair Value
   Percentage
of Total
Portfolio
 
   ($ in thousands) 
Banking, Finance, Insurance & Real Estate  $114,570    18.9%  $123,124    19.3%
Services: Business   65,947    10.9    69,491    10.9 
High Tech Industries   52,636    8.7    60,048    9.4 
Healthcare & Pharmaceuticals   38,952    6.4    43,136    6.8 
Services: Consumer   34,544    5.7    41,393    6.5 
Consumer goods: Durable   24,887    4.1    21,085    3.3 
Retail   24,049    4.0    16,050    2.5 
Chemicals, Plastics, & Rubber   23,857    3.9    22,669    3.5 
Telecommunications   22,514    3.7    27,058    4.2 
Automotive   20,410    3.4    24,207    3.8 
Media: Advertising, Printing & Publishing   20,309    3.4    19,660    3.1 
Containers, Packaging & Glass   18,239    3.0    15,253    2.4 
Beverage, Food & Tobacco   14,501    2.4    22,086    3.5 
Hotel, Gaming & Leisure   14,315    2.4    16,572    2.6 
Construction & Building   13,875    2.3    11,102    1.7 
Consumer goods: Non-durable   13,734    2.3    14,359    2.2 
Aerospace & Defense   13,688    2.3    14,369    2.2 
Media: Broadcasting & Subscription   11,143    1.8    11,539    1.8 
Media: Diversified & Production   9,279    1.5    9,203    1.4 
Capital Equipment   8,450    1.4    10,062    1.6 
Transportation: Cargo   8,236    1.4    3,752    0.6 
Wholesale   8,011    1.3    4,155    0.7 
Utilities: Oil & Gas   7,246    1.2    8,095    1.3 
Transportation: Consumer   6,844    1.1    4,891    0.8 
Metals & Mining   3,239    0.5    6,846    1.1 
Forest Products & Paper   3,190    0.5    9,367    1.5 
Energy: Oil & Gas   2,676    0.4    155    0.0 
Utilities: Electric   2,353    0.4    4,026    0.6 
Environmental Industries   2,155    0.4    1,550    0.2 
Energy: Electricity   2,105    0.3    3,660    0.6 
Total  $605,954    100.0%  $638,963    100.0%

 

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Portfolio composition by geographic location at fair value

 

The following table shows our portfolio composition by geographic location at fair value at February 28, 2023 and February 28, 2022. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

 

   February 28, 2023   February 28, 2022 
   Investments
at
Fair Value
   Percentage
of Total
Portfolio
   Investments
at
Fair Value
   Percentage
of Total
Portfolio
 
   ($ in thousands) 
Southeast  $247,192    25.4%  $257,199    31.5%
Midwest   199,944    20.6    160,718    19.7 
West   173,283    17.8    183,643    22.5 
Northeast   133,158    13.7    85,414    10.4 
Southwest   123,744    12.7    62,475    7.6 
Other(1)   92,760    9.5    66,482    8.1 
Northwest   2,509    0.3    1,636    0.2 
Total  $972,590    100.0%  $817,567    100.0%

 

 

(1)As of February 28, 2023, comprised of our investments in the subordinated notes, F-2-R-3 Notes of Saratoga CLO, as well as the unsecured notes and equity interests in the SLF JV and foreign investments. As of February 28, 2022, comprised of our investments in the subordinated notes, F-2-R-3 Notes of Saratoga CLO, as well as the unsecured notes and equity interests in the SLF JV and foreign investments.

 

Results of operations

 

Operating results for the fiscal years ended February 28, 2023, February 28, 2022 and February 28, 2021 were as follows:

 

   For the Year Ended 
   February 28, 2023   February 28, 2022   February 28, 2021 
   ($ in thousands) 
Total investment income  $99,104   $70,740   $57,650 
Total operating expenses   63,903    50,797    34,537 
Net investment income   35,201    19,943    23,113 
Net realized gains (losses) from investments   7,446    13,398    (8,704)
Income tax (provision) benefit from realized gain on investments   549    (2,886)   (3,895)
Net change in unrealized appreciation (depreciation) on investments   (15,218)   17,020    4,966 
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   (1,715)   695    (574)
Loss on extinguishment of debt*   (1,587)   (2,434)   (129)
Net increase in net assets resulting from operations  $24,676   $45,735   $14,777 

 

 

*Certain prior period amounts have been reclassified to conform to current period presentation.

 

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Investment income

 

The composition of our investment income for the fiscal years ended February 28, 2023, February 28, 2022 and February 28, 2021 were as follows:

 

   For the Year Ended 
   February 28, 2023   February 28, 2022   February 28, 2021 
   ($ in thousands) 
Interest from investments  $85,217   $58,502   $51,714 
Interest from cash and cash equivalents   1,368    4    14 
Management fee income   3,270    3,263    2,508 
Incentive fee income   -    -    - 
Dividend Income*   2,720    1,926    158 
Structuring and advisory fee income   3,585    4,308    2,157 
Other income*   2,944    2,739    1,099 
Total investment income  $99,104   $70,740   $57,650 

 

 

*Certain prior period amounts have been reclassified to conform to current period presentation.

 

For the fiscal year ended February 28, 2023, total investment income increased $28.4 million, or 40.1%, to $99.1 million for the fiscal year ended February 28, 2023 compared to $13.1 million for the fiscal year ended February 28, 2022. Interest income from investments increased $26.7 million, or 45.7%, to $85.2 million for the year ended February 28, 2023 from $58.5 million for the fiscal year ended February 28, 2022. The increase in interest income for the fiscal year ended February 28, 2023 is primarily attributable to an increase of 19.0% in total investments to $972.6 million from $817.6 million in the prior period, as well as the increase in the weighted average current yield on investments of 10.7% compared to 7.7% in the prior period.

 

For the fiscal year ended February 28, 2022, total investment income increased $13.1 million, or 22.7% compared to the fiscal year ended February 28, 2021. Interest income from investments increased $6.8 million, or 13.1%, to $58.5 million for the year ended February 28, 2022 from $51.7 million for the fiscal year ended February 28, 2021. The increase in interest income for the fiscal year ended February 28, 2022 is primarily attributable to an increase of 47.5% in total investments to $817.6 million from $554.3 million in the prior period, partially offset by a decrease in the weighted average current yield on investments to 7.7% from 9.1% in the prior period.

 

For the fiscal year ended February 28, 2023 and February 28, 2022, total PIK income was $1.2 million and $1.5 million, respectively. This decrease was primarily due to the repayment of debt securities that elected to pay a portion of their interest in PIK.

 

For the fiscal year ended February 28, 2022 and February 28, 2021, total PIK income was $1.5 million and $2.6 million, respectively. This decrease was primarily due to the repayment of debt securities that elected to pay a portion of their interest in PIK and the change in PIK interest of investments that were restored from non-accrual to accrual status over the past two years.

 

Management fee income reflects the fee income received for managing the Saratoga CLO. For the years ended February 28, 2023, 2022 and 2021, total management fee income was $3.3 million, $3.3 million and $2.5 million, respectively.

 

For the fiscal year ended February 28, 2023, February 28, 2022 and February 28, 2021, total dividend income was $2.7 million, $1.9 million and $0.1 million, respectively. Dividends received is recorded in the consolidated statements of operations when earned, and the increase primarily reflects dividend income received on various preferred equity investments.

 

For the fiscal year ended February 28, 2023, February 28, 2022 and February 28, 2021, total structuring and advisory fee income was $3.6 million, $4.3 million and $2.2 million, respectively. Structuring and advisory fee income represents fee income earned and received performing certain investment and advisory activities during the closing of new investments, with the changes year-over-year primarily reflecting the increased or decreased originations during the period.

 

For the fiscal year ended February 28, 2023, February 28, 2022 and February 28, 2021, other income was $2.9 million, $2.7 million and $1.1 million, respectively. Other income primarily includes prepayment, amendment and redemption fees and is recorded in the consolidated statements of operations when earned.

 

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Operating expenses

 

The composition of our operating expenses for the years ended February 28, 2023, February 28, 2022 and February 28, 2021 were as follows:

 

   For the Year Ended 
   February 28, 2023   February 28, 2022   February 28, 2021 
   ($ in thousands) 
Interest and debt financing expenses  $33,499   $19,880   $13,587 
Base management fees   16,424    11,902    9,098 
Incentive management fees   5,057    11,794    4,904 
Professional fees   1,812    1,378    1,706 
Administrator expenses   3,160    2,906    2,546 
Insurance   347    349    285 
Directors fees and expenses   360    336    290 
General and administrative and other expenses   2,329    1,662    1,428 
Income tax benefit   (153)   (40)   1 
Excise tax expense (credit)   1,068    630    692 
Total operating expenses  $63,903   $50,797   $34,537 

 

For the year ended February 28, 2023, total operating expenses increased $13.1 million, or 25.8%, to $63.9 million for the year ended February 28, 2023 compared to $50.8 million for the year ended February 28, 2022. For the year ended February 28, 2022, total operating expenses increased $16.3 million, or 47.2%, to $50.8 million for the year ended February 28, 2022 compared to $34.5 million for the year ended February 28, 2021.

 

For the year ended February 28, 2023, interest and debt financing expenses increased $13.6 million, or 68.5% compared to the year ended February 28, 2022. The increase is attributable to both the total average outstanding debt increasing from $417.4 million for the year ended February 28, 2022 to $663.0 million for the year ended February 28, 2023, as well as the weighted average interest rate on our outstanding indebtedness increasing from 4.15% to 4.48% for the same periods. The increase in total average outstanding debt and the weighted average interest rate was primarily due to the issuance during the year ended February 28, 2023 of the higher-cost 6.00% 2027 Notes, 7.00% 2025 Notes, 8.00% 2027 Notes and 8.125% 2027 Notes. At February 28, 2023 and February 28, 2022, the lower-cost SBA debentures represented 27.7% and 36.2% of overall debt, respectively.

 

For the years ended February 28, 2022 and February 28, 2021, the increase in interest and debt financing expenses is primarily attributable to an increase in total outstanding debt. The increase is primarily attributable to an increase in average outstanding debt from $264.2 million for the year ended February 28, 2021 to $417.4 million for the year ended February 28, 2022. For the year ended February 28, 2022, the weighted average interest rate on our outstanding indebtedness was 4.15% compared to the 4.46% for the year ended February 28, 2021. The decrease in weighted average interest rate was primarily driven by the issuance of new SBA debentures that carry a lower interest rate. At February 28, 2022 and February 28, 2021, the SBA debentures represented 36.2% and 56.2% of overall debt, respectively.

 

For the year ended February 28, 2023, base management fees increased $4.5 million, or 38.0% compared to the fiscal year ended February 28, 2022. The increase in base management fees is due to the 38.0% increase in the average value of our total assets, less cash and cash equivalents, from $680.1 million as of February 28, 2022 to $938.5 million as of February 28, 2023.

 

For the year ended February 28, 2022, base management fees increased $2.8 million, or 30.8% compared to the fiscal year ended February 28, 2021. The increase in base management fees is due to the 30.8% increase in the average value of our total assets, less cash and cash equivalents, from $519.9 million as of February 28, 2021 to $680.1 million as of February 28, 2022.

 

For the year ended February 28, 2023, incentive fees decreased $6.7 million, or 57.1% compared to the fiscal year ended February 28, 2022. The incentive fee on income increased this year from $6.4 million for the year ended February 28, 2022 to $6.8 million for the year ended February 28, 2023, reflecting the increased operating performance of our debt investments during this period. The incentive fees on capital gains decreased from $5.5 million expense for the fiscal year ended February 28, 2022 to ($1.7) million benefit for the fiscal year ended February 28, 2023, both reflecting the incentive fee income and expense on net unrealized appreciation and depreciation recognized during both these periods.

 

For the year ended February 28, 2022, incentive fees increased $6.9 million, or 141.7% compared to the fiscal year ended February 28, 2021. The incentive fee on income increased this year from $5.4 million for the year ended February 28, 2021 to $6.4 million for the year ended February 28, 2022, reflecting the increased operating performance of our debt investments during this period. The incentive fees on capital gains increased from $(0.5) million benefit for the fiscal year ended February 28, 2021 to $5.5 million expense for the fiscal year ended February 28, 2022, reflecting the incentive fee expense on net realized gains and net unrealized appreciation this quarter across numerous investments.

 

89

 

 

For the year ended February 28, 2023, professional fees increased $0.4 million, or 31.5% compared to the fiscal year ended February 28, 2022. This increase primarily reflects growth across accounting, legal and consulting fees in connection with an increase in our assets and legal entities, as well as the increased rates across vendors in the current inflation environment.

 

For the year ended February 28, 2022, professional fees decreased $0.3 million, or 19.2% compared to the fiscal year ended February 28, 2021. This decrease primarily reflects optimization across accounting, legal and consulting fees in connection with an increase in our assets and the Company bringing certain services in-house.

 

For the year ended February 28, 2023, administrator expenses increased $0.3 million, or 8.7% compared to the fiscal year ended February 28, 2022, which reflects an increase to the cap on the payment or reimbursement of expenses by the Company from $3.0 million to 3.275 million, effective August 1, 2022.

 

For the year ended February 28, 2022, administrator expenses increased $0.4 million, or 14.2% compared to the fiscal year ended February 28, 2021, which reflects an increase to the cap on the payment or reimbursement of expenses by the Company from $2.775 million to $3.0 million, effective August 1, 2021.

  

For the fiscal years ended February 28, 2023, February 28, 2022 and February 28, 2021, the average borrowings outstanding under the Credit Facilities was approximately $26.3 million, $8.7 million and $1.8 million, respectively, and the average weighted average interest rate on the outstanding borrowing under the Credit Facilities was 6.72%, 5.22% and 0.17%, respectively.

 

For the fiscal years ended February 28, 2023, February 28, 2022 and February 28, 2021, the average borrowings outstanding of SBA debentures was $230.0 million, $180.4 million and $169.3 million, respectively. For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, the weighted average interest rate on the outstanding borrowings of the SBA debentures was 2.78%, 2.60% and 3.25%, respectively.

 

During the year ended February 28, 2023 and February 28, 2022, the average dollar amount of our 7.00% 2025 Notes outstanding was $5.7 million and $0.0 million, respectively.

 

During the year ended February 28, 2023 and February 28, 2022, the average dollar amount of our 7.25% 2025 Notes outstanding was $13.6 million and $43.1 million, respectively. On June 24, 2022, the Company redeemed $43.1 million in aggregate principal amount of issued and outstanding 7.25% 2025 Notes.

 

During the year ended February 28, 2023 and February 28, 2022, the average dollar amount of our 7.75% 2025 Notes outstanding was $5.0 million and $5.0 million, respectively.

 

During the year ended February 28, 2023 and February 28, 2022, the average dollar amount of our 4.375% 2026 Notes outstanding was $175.0 million and $130.4 million, respectively.

 

During the year ended February 28, 2023 and February 28, 2022, the average dollar amount of our 4.35% 2027 Notes outstanding was $75.0 million and $8.4 million, respectively.

 

During the year ended February 28, 2023 and February 28, 2022, the average dollar amount of our 6.25% 2027 Notes outstanding was $15.0 million and $15.0 million, respectively.

 

During the year ended February 28, 2023 and February 28, 2022, the average dollar amount of our 6.00% 2027 Notes outstanding was $88.2 million and $0.0 million, respectively.

 

During the year ended February 28, 2023 and February 28, 2022, the average dollar amount of our 8.00% 2027 Notes outstanding was $15.6 million and $0.0 million, respectively.

 

During the year ended February 28, 2023 and February 28, 2022, the average dollar amount of our 8.125% 2027 Notes outstanding was $13.2 million and $0.0 million, respectively.

 

For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, we recognized income tax expense (benefit) of ($0.15) million, ($0.04) million and $0.0 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 entities that are treated as corporations for U.S. federal income tax purposes, as well as current U.S. federal and state income taxes on those operating gains and losses when realized.

 

90

 

 

For the year ended February 28, 2023, we accrued excise taxes of $1.1 million on undistributed taxable income as of December 31, 2022. For the year ended February 28, 2022, we accrued excise taxes of $0.6 million on undistributed taxable income as of December 31, 2021.

 

Net realized gains (losses) on sales of investments

 

For the fiscal year ended February 28, 2023, the Company had $222.2 million of sales, repayments, exits or restructurings resulting in $7.4 million of net realized gains. The most significant realized gains and losses during the year ended February 28, 2023 were as follows (dollars in thousands):

 

Fiscal year ended February 28, 2023

 

Issuer  Asset Type  Gross
Proceeds
   Cost   Net
Realized
Gain (Loss)
 
PDDS Buyer, LLC  Equity Interests  $9,943,838   $2,000,000   $7,943,838 
Ohio Medical, LLC  Equity Interests   770,161    380,353    389,808 
Targus Holdings, Inc.  Equity Interests   540,075    1,589,630    (1,049,555)
Censis Technologies, Inc.  Equity Interests   -    -    68,731 
Texas Teachers of Tomorrow, LLC  Equity Interests   -    -    24,977 
V Rental Holdings LLC  Equity Interests   -    -    68,800 

 

The $7.9 million of net realized gains was from the sales of the equity position in our investment in   PDDS Buyer, LLC.

 

The $0.4 million of net realized gains was from the sales of the equity position in our investment in Ohio Medical, LLC.

 

The $1.0 million of net realized loss was from the sales of the equity position in our investment in Targus Holding, Inc.

 

The Company received escrow payments from the prior sales of its investments in Censis Technologies, Inc., Texas Teachers of Tomorrow, LLC and V Rental Holdings LLC.

 

For the fiscal year ended February 28, 2022, the Company had $226.9 million of sales, repayments, exits or restructurings resulting in $13.4 million of net realized loss. The most significant realized gains and losses during the year ended February 28, 2022 were as follows (dollars in thousands):

 

Fiscal year ended February 28, 2022

 

Issuer  Asset Type  Gross
Proceeds
   Cost   Net
Realized
Gain (Loss)
 
GreyHeller LLC  Equity Interests  $8,178   $850   $7,328 
Lexipol, LLC  Equity Interests   10,792    10,792    - 
My Alarm Center, LLC  Equity Interests   -    4,867    (4,867)
Passageways, Inc.  Equity Interests   7,440    1,000    6,476 
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-1-R-3 Note  Structured Finance Securities   8,360    8,500    (140)
Texas Teachers of Tomorrow, LLC  Equity Interests   3,339    750    2,589 
V Rental Holdings LLC  Equity Interests   2,345    366    1,979 

 

The $7.3 million of net realized gains was from the sales of the equity position in our investment in GreyHeller LLC.

 

The $0.1 million of net realized loss was from the sales of the equity position in our investment in Lexipol, LLC.

 

The $4.9 million of net realized loss was from our investment in My Alarm Center, LLC that was deemed worthless during this period.

 

The $6.4 million of net realized gains was from the sales of the equity position in our investment in Passageways Inc.

 

The $0.1 million of net realized loss was from the repayment of the structured finance securities in the Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-1-R-3 Note.

 

The $2.6 million of net realized gains was from the sales of the equity position in our investment in Texas Teachers of Tomorrow, LLC .

 

The $1.9 million of net realized gains was from the sales of the equity position in our investment in V Rental Holdings LLC.

 

91

 

 

For the fiscal year ended February 28, 2021, the Company had $130.3 million of sales, repayments, exits or restructurings resulting in $8.7 million of net realized gains. The most significant realized gains and losses during the year ended February 28, 2021 were as follows (dollars in thousands):

 

Fiscal year ended February 28, 2021

 

Issuer  Asset Type  Gross
Proceeds
   Cost   Net
Realized
Gain
 
Elyria Foundry Company, L.L.C  Equity Interests  $959   $9,685   $(8,726)

 

The $8.7 million of net realized losses was from the sales of the equity positions in our investment in Elyria Foundry Company, L.L.C.

 

Net change in unrealized appreciation (depreciation) on investments

 

For the year ended February 28, 2023, our investments had a net change in unrealized depreciation of $15.2 million compared to a net change in unrealized appreciation of $17.0 million for the year ended February 28, 2022. The most significant cumulative changes in unrealized appreciation (depreciation) for the year ended February 28, 2023, were the following (dollars in thousands):

 

Fiscal year ended February 28, 2023

 

Issuer  Asset Type  Cost   Fair Value   Total Unrealized Appreciation (Depreciation)   YTD Change in Unrealized  Appreciation (Depreciation) 
Pepper Palace, Inc.  First Lien Term Loan & Equity Interests  $34,256   $24,411   $(9,845)  $      (9,327)
Artemis Wax Corp.  First Lien Term Loan & Equity Interests   60,059    63,642    3,583    2,123 
Vector Controls Holding Co., LLC  First Lien Term Loan & Equity Interests   3,090    9,608    6,518    3,099 
Axero Holdings, LLC  First Lien Term Loan & Equity Interests   10,551    13,052    2,500    1,952 
Destiny Solutions Inc.  First Lien Term Loan & Equity Interests   3,969    8,941    4,972    1,309 
Zollege PBC  First Lien Term Loan & Equity Interests   16,652    15,333    (1,319)   (1,185)
Netreo Holdings, LLC  First Lien Term Loan & Equity Interests   35,887    44,167    8,280    (2,363)
PDDS Buyer, LLC  First Lien Term Loan & Equity Interests   -    -    -    (5,094)
Saratoga Investment Corp. CLO 2013-1, Ltd.  Structured Finance Securities   28,944    21,177    (7,767)   (4,149)
Saratoga Senior Loan Fund I JV, LLC  Equity Interests   35,202    30,726    (4,476)   (3,368)

 

The $9.3 million net change in unrealized depreciation in our investment in Pepper Palace, Inc. was driven by overall company performance.

 

The $2.1 million net change in unrealized appreciation in our investment in Artemis Wax Corp. was driven by improved financial performance.

 

The $3.1 million net change in unrealized appreciation in our investment in Vector Controls Holding Co., LLC was driven by improved financial performance.

 

The $2.0 million net change in unrealized appreciation in our investment in Axero Holdings, LLC was driven by growth and overall strong financial performance.

 

The $1.3 million net change in unrealized appreciation in our investment in Destiny Solutions Inc. was driven by growth and overall strong financial performance.

 

The $1.2 million net change in unrealized depreciation in our investment in Zollege PBC was driven by weakened financial performance.

 

The $2.4 million net change in unrealized depreciation in our investment in Netreo Holdings, LLC was driven by increased leverage and slowing top line growth.

 

The $5.1 million net change in unrealized depreciation in our investment in PDDS Buyer, LLC was driven by the sale of that investment, resulting in a reversal of previously recognized unrealized appreciation reclassified to realized gains.

 

The $4.1 million net change in unrealized depreciation in our investment in Saratoga Investment Corp. CLO 2013-1 Ltd. was driven by the increase in discount rates and overall market conditions.

 

The $3.4 million net change in unrealized depreciation in our investment in Saratoga Senior Loan Fund I JV, LLC was driven by the increase in discount rates and overall market conditions.

 

92

 

 

For the year ended February 28, 2022, our investments had a net change in unrealized appreciation of $17.0 million compared to a net change in unrealized appreciation of $5.0 million for the year ended February 28, 2021. The most significant cumulative changes in unrealized appreciation (depreciation) for the year ended February 28, 2022, were the following (dollars in thousands):

 

Fiscal year ended February 28, 2022

 

Issuer  Asset Type  Cost   Fair Value   Total Unrealized Appreciation (Depreciation)   YTD Change in Unrealized  Appreciation (Depreciation) 
ArbiterSports, LLC  First Term Lien Loan  $26,846   $26,654   $(192)  $1,140 
Artemis Wax  First Term Lien Loan & Equity Interests   36,774    38,234    1,460    1,460 
C2 Educational Systems  First Term Lien Loan & Equity Interests   18,985    18,820    (165)   2,334 
Destiny Solutions Inc.  First Term Lien Loan & Equity Interests   3,969    7,632    3,663    2,636 
GreyHeller LLC  First Term Lien Loan & Equity Interests   1,636    1,636    -    (3,103)
My Alarm Center, LLC  Equity Interests   -    -    -    4,686 
Netreo Holdings, LLC  First Term Lien Loan & Equity Interests   27,160    37,804    10,644    5,056 
Passageways, Inc.  First Term Lien Loan & Equity Interests   -    -    -    (2,311)
PDDS  First Term Lien Loan & Equity Interests   29,944    35,038    5,094    4,270 
Saratoga Investment Corp. CLO 2013-1, Ltd.  Structured Finance Securities   41,648    38,030    (3,618)   (1,675)
Saratoga Senior Loan Fund I JV, LLC  Unsecrued & Equity Interest   26,250    25,141    (1,109)   (1,109)
SCHOOX INVESTMENTS LLC  Equity Interests   476    3,306    2,830    2,830 
TG Pressure Washing Holdings  First Term Lien Loan & Equity Interests   488    482    (6)   1,060 
Village Realty Holdings LLC  First Term Lien Loan & Equity Interests   -    -    -    (2,183)
Vector Controls  First Term Lien Loan & Equity Interests   5,008    8,427    3,419    1,393 

 

The $1.1 million net change in unrealized appreciation in our investment in ArbiterSports, LLC was driven by improved financial performance.

 

The $1.5 million net change in unrealized appreciation in our investment in Artemis Wax was driven by improved financial performance.

 

The $2.3 million net change in unrealized appreciation in our investment in C2 Education Systems was driven by improved financial performance.

  

The $2.6 million net change in unrealized appreciation in our investment in Destiny Solutions Inc. was driven by growth and overall strong financial performance.

 

The $3.1 million net change in unrealized depreciation in our investment in GreyHeller LLC. was driven by the sale of that investment, resulting in a reversal of previously recognized unrealized appreciation reclassified to realized gains.

 

The $4.7 million net change in unrealized appreciation in our investment in My Alarm Center, LLC was driven by the reversal of previously recognized unrealized depreciation reclassified to realized losses.

 

The $5.1 million net change in unrealized appreciation in our investment in Netreo Holdings, LLC was driven by growth and improved financial performance.

 

The $2.3 million net change in unrealized depreciation in our investment in Passageways, Inc. was driven by the sale of that investment, resulting in a reversal of previously recognized unrealized appreciation reclassified to realized gains.

 

The $4.3 million net change in unrealized appreciation in our investment in PDDS Buyer, LLC was driven by overall strong company performance.

 

The $1.7 million net change in unrealized depreciation in our investment in Saratoga Investment Corp. CLO 2013-1 Ltd. was driven by the increase in discount rates, impact of LIBOR changes and overall market conditions. 

 

The $1.1 million net change in unrealized depreciation in our investment in Saratoga Senior Loan Fund I JV, LLC was driven by market volatility of the underlying investments of the fund.

 

The $2.8 million net change in unrealized appreciation in our investment in Schoox, Inc. was driven by overall strong company performance.

 

The $1.1 million net change in unrealized appreciation in our investment in Top Gun Pressure Washing, LLC was driven by growth, improved financial performance, and a reduced leverage profile.

 

The $2.2 million net change in unrealized depreciation in our investment in Village Realty Holdings, LLC was driven by the sale of that investment, resulting in a reversal of previously recognized unrealized appreciation reclassified to realized gains.

 

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The $1.4 million net change in unrealized appreciation in our investment in Vector Controls. was driven by growth and overall strong financial performance.

 

For the year ended February 28, 2021, our investments had a net change in unrealized appreciation of $5.0 million compared to a net change in unrealized depreciation of $0.8 million for the year ended February 29, 2020. The most significant cumulative changes in unrealized appreciation (depreciation) for the year ended February 28, 2021, were the following (dollars in thousands):

 

Fiscal year ended February 28, 2021 

 

Issuer  Asset Type  Cost   Fair Value   Total Unrealized Appreciation (Depreciation)   YTD Change in Unrealized  Appreciation (Depreciation) 
ArbiterSports, LLC  First Term Lien Loan  $26,801   $25,469   $(1,332)  $(1,306)
C2 Educational Systems  First Term Lien Loan   15,998    13,499    (2,499)   (2,517)
Elyria Foundry Company, L.L.C.  Equity Interests   9,685    730    (8,955)   7,745 
Knowland Group, LLC  Second Lien Term Loan   15,768    10,788    (4,980)   (4,873)
My Alarm Center, LLC  Equity Interests   712    181    (531)   1,816 
Netreo Holdings, LLC  First Term Lien Loan & Equity Interests   9,632    15,220    5,588    1,832 
Passageways, Inc.  First Term Lien Loan & Equity Interests   10,953    13,264    2,311    1,173 
Roscoe Medical, Inc.  Second Lien Term Loan & Equity Interests   5,649    5,422    (227)   2,343 
Saratoga Investment Corp. CLO 2013-1, Ltd.  Structured Finance Securities   33,847    31,450    (2,397)   (1,434)
Village Realty Holdings LLC  First Term Lien Loan & Equity Interests   12,394    14,577    2,183    2,038 

 

The $1.3 million net change in unrealized depreciation in our investment in ArbiterSports, LLC was driven by disruptions to its business due to COVID-related shutdowns.

 

The $2.5 million net change in unrealized depreciation in our investment C2 Education Systems was driven by disruptions to its business due to COVID-related shutdowns.

 

The $7.7 million net unrealized loss reversal in our investment in Elyria Foundry Company, L.L.C. was due to the realization of this investment, which resulted in a net unrealized appreciation during the period.

 

The $4.9 million net change in unrealized depreciation in our investment in Knowland Group, LLC was driven by disruptions to its business due to COVID-related shutdowns.

 

The $1.8 million net change in unrealized depreciation in our investment in My Alarm Center, LLC was driven by increasing leverage levels combined with declining market conditions in the sector.

 

The $1.8 million net change in unrealized appreciation in our investment in Netreo Holdings, LLC was driven by growth and improved financial performance.

 

The $1.2 million net change in unrealized appreciation in our investment in Passageways, Inc. was driven by growth and improved financial performance.

 

The $2.3 million net change in unrealized appreciation in our investment in Roscoe Medical, Inc. was driven by continued improvement in the company’s performance.

 

The $1.4 million of unrealized depreciation in our investment in Saratoga Investment Corp. CLO 2013-1, Ltd. was driven by a reduction in base interest rates during the period, along with expenses resulting from the recapitalization of the CLO.

 

The $2.0 million net change in unrealized appreciation in our investment in Village Realty Holdings, LLC was driven by increased customer demand during its peak season this year.

 

Changes in net assets resulting from operations

 

For the fiscal years ended February 28, 2023, February 28, 2022 and February 28, 2021, we recorded a net increase in net assets resulting from operations of $24.7 million, $45.7 million and $14.8 million, respectively. Based on 11,963,533 weighted average common shares outstanding as of February 28, 2023, our per share net increase in net assets resulting from operations was $2.06 for the fiscal year ended February 28, 2023. This compares to a per share net increase in net assets resulting from operations of $3.99 for the fiscal year ended February 28, 2022 (based on 11,456,631 weighted average common shares outstanding as of February 28, 2022), and a per share net increase in net assets resulting from operations of $1.32 for the fiscal year ended February 28, 2021 (based on 11,188,629 weighted average common shares outstanding as of February 28, 2021).

 

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, the Encina Credit Facility, our continued access to the SBA debentures future borrowings and future offerings of debt and equity securities.

 

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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”), our equity ATM program, 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 NAV per share and we are limited in our ability to sell our common stock at a price below NAV 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%, reduced to 150% effective April 16, 2019 following the approval received from the board of directors, including a majority of our independent 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 165.9% as of February 28, 2023 and 209.2% as of February 28, 2022. 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.

 

Due to the diverse capital sources available to us at this time, we believe we have adequate liquidity to support our near term capital requirements.

 

Madison Revolving Credit Facility

 

The senior secured revolving credit facility we entered into with Madison Capital Funding LLC (the “Madison Credit Facility”) on June 30, 2010, which was most recently amended on September 3, 2021 and then fully repaid and terminated on October 4, 2021.

 

Encina Credit Facility

 

Below is a summary of the terms of the senior secured revolving credit facility we entered into with Encina Lender Finance, LLC on October 4, 2021.

 

Commitment. The Company entered into the Credit and Security Agreement (the “Credit Agreement”) relating to the Encina Credit Facility in the initial facility amount of $50.0 million (the “Facility Amount”). 

 

Availability. The Company can draw up to the lesser of (i) the Facility Amount and (ii) the Borrowing Base. The Borrowing Base is an amount equal to (i) the difference of (A) the product of the applicable advance rate which varies from 50.0% to 75.0% depending on the type of loan asset (Defaulted Loans being excluded in that they carry an advance rate of 0%) and the value, determined in accordance with the Encina Credit Facility (the “Adjusted Borrowing Value”), of certain “eligible” loan assets pledged as security for the loan (the “Borrowing Base Value”) and (B) the Excess Concentration Amount, as calculated in accordance with the Encina Credit Facility, plus (ii) any amounts held in the Prefunding Account and, without duplication, Excess Cash held in the Collection Account, less (iii) the product of (a) the amount of any undrawn funding commitments the Company has under any loan asset and (b) the Unfunded Exposure Haircut Percentage, and less (iv) $100,000. Each loan asset held by the Company as of the date on which the Encina 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 and under certain circumstances, 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.

 

The Encina 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.

 

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The Encina Credit Facility requires certain minimum drawn amounts. For the period beginning on the closing date and ended April 4, 2022, the minimum funding amount was $12.5 million. For the period beginning on April 5, 2022 through maturity, the minimum funding amount is the greater of $25.0 million and 50% of the Facility Amount in effect from time to time.

 

Collateral. The Encina Credit Facility is secured by assets of Saratoga Investment Funding II LLC (“SIF II”) and pledged to the lender under the credit facility. SIF II is a wholly owned special purpose entity formed by the Company for the purpose of entering into the Encina Credit Facility.

 

Interest Rate and Fees. Under the Encina Credit Facility, funds were borrowed from or through certain lenders at the greater of the prevailing LIBOR rate and 0.75%, plus an applicable margin of 4.00%. The Credit Agreement includes benchmark replacement provisions which permit the Administrative Agent and the borrower to select a replacement rate upon the unavailability of LIBOR. In addition, the Company pays 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 Encina Credit Facility for the duration of the term of the Encina Credit Facility. Accrued interest and commitment fees are payable monthly in arrears. The Company was also obligated to pay certain other fees to the lenders in connection with the closing of the Encina Credit Facility.

 

Collateral Tests. It is a condition precedent to any borrowing under the Encina Credit Facility that the principal amount outstanding under the Encina Credit Facility, after giving effect to the proposed borrowings, not exceed the Borrowing Base (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”):

 

  o 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 Encina Credit Facility, to accrued interest and commitment fees payable to the lenders under the Encina Credit Facility for the last 6 payment periods must equal at least 175.0%.

 

  o 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 (in each case, subject to certain adjustments) to outstanding borrowings under the Encina Credit Facility plus the Unfunded Exposure Amount must equal at least 200.0%.

 

The Encina Credit Facility also may require 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 ineligible collateral loans will be excluded from the calculation of the Borrowing Base and may lead to a Borrowing Base Deficiency, which may be cured by effecting one or more (or any combination thereof) of the following actions: (A) deposit into or credit to the collection account cash and eligible investments, (B) repay outstanding borrowings (together with certain costs and expenses), (C) sell or substitute loan assets in accordance with the Encina Credit Facility, or (D) pledge additional loan assets as collateral. Compliance with the Collateral Tests is also a condition to the discretionary sale of pledged loan assets by the Company.

 

Priority of Payments. The priority of payments provisions of the Encina Credit Facility require, after payment of specified fees and expenses, that collections of interest from the loan assets and, to the extent that these are insufficient, collections of principal 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.

 

Operating Expenses. The priority of payments provision of the Encina Credit Facility provides for the payment of certain operating expenses of the Company out of collections on interest and principal in accordance with the priority established in such provision. The operating expenses payable pursuant to the priority of payment provisions is limited to $200,000 per annum.

  

Covenants; Representations and Warranties; Events of Default. The Credit Agreement contains customary representations and warranties, affirmative covenants, negative covenants and events of default. The Credit Agreement does not contain grace periods for breach by the Company of any negative covenants or of certain of the affirmative covenants, including, without limitation, those related to preservation of the existence and separateness of the Company. Other events of default under the Credit Agreement include, among other things, the following:

 

  o Failure of the Company to maintain an Interest Coverage Ratio of less than 175%;

 

  o Failure of the Company to maintain an Overcollateralization Ratio of less than 200%;

 

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  o the filing of certain ERISA or tax liens on assets of the Company or the Equityholder;

 

  o failure by Specified Holders to collectively, directly or indirectly, own and control at least 51% of the outstanding equity interests of Saratoga Investment Advisor, or (y) possess the right to elect (through contract, ownership of voting securities or otherwise) at all times a majority of the board of directors (or similar governing body) of Saratoga Investment Advisor and to direct the management policies and decisions of Saratoga Investment Advisor, or (ii) the dissolution, termination or liquidation in whole or in part, transfer or other disposition, in each case, of all or substantially all of the assets of, Saratoga Investment Advisor;

 

  o 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 Encina Lender Finance appointed to replace such key person within 30 days;

 

  o 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 Encina Lender Finance appointed within 30 days.

 

Fees and Expenses. The Company paid certain fees and reimbursed Encina Lender Finance, LLC for the aggregate amount of all documented, out-of-pocket costs and expenses, including the reasonable fees and expenses of lawyers, incurred by Encina Lender Finance, LLC in connection with the Encina Credit Facility and the carrying out of any and all acts contemplated thereunder up to and as of the date of closing. These amounts totaled $1.4 million.

 

On January 27, 2023, we entered into the first amendment to the Credit Agreement to, among other things:

 

increased the borrowings available under the Encina Credit Facility from up to $50.0 million to up to $65.0 million;
   
changed the underlying benchmark used to compute interest under the Credit Agreement from LIBOR to Term SOFR for a one-month tenor plus a 0.10% credit spread adjustment;
   
increased the applicable effective margin rate on borrowings from 4.00% to 4.25%;
   
extended the revolving period from October 4, 2024 to January 27, 2026;
   
extended the period during which the borrower may request one or more increases in the borrowings available under the Encina Credit Facility (each such increase, a “Facility Increase”) from October 4, 2023 to January 27, 2025, and increased the maximum borrowings available pursuant to such Facility Increase from $75.0 million to $150.0 million;
   
revised the eligibility criteria for eligible collateral loans to exclude certain industries in which an obligor or related guarantor may be involved; and
   
amended the provisions permitting the borrower to request an extension in the Commitment Termination Date (as defined in the Credit Agreement) to allow requests to extend any applicable Commitment Termination Date, rather than a one-time request to extend the original Commitment Termination Date, subject to a notice requirement.

  

As of February 28, 2023, we had $32.5 million outstanding borrowings under the Credit Facility and $202.0 million of SBA-guaranteed debentures outstanding (which are discussed below). As of February 28, 2022, we had $12.5 million outstanding borrowings under the Credit Facility and $185.0 million of SBA-guaranteed debentures outstanding. Our borrowing base under the Credit Facility at February 28, 2023 and February 28, 2022 was $65.0 million and $50.0 million, respectively.

 

Our asset coverage ratio, as defined in the 1940 Act, was 165.9% as of February 28, 2023 and 209.2% as of February 28, 2022.

 

SBA-guaranteed debentures

 

In addition, we, through three wholly owned subsidiaries, sought and obtained licenses from the SBA to operate an SBIC. In this regard, our wholly owned subsidiaries, Saratoga Investment Corp. SBIC LP (“SBIC LP”), Saratoga Investment Corp. SBIC II LP (“SBIC II LP”), and Saratoga Investment Corp. SBIC III LP (“SBIC III LP”, and together with SBIC LP and SBIC II LP, the “SBIC Subsidiaries”), received an SBIC license from the SBA on March 28, 2012, August 14, 2019, and September 29, 2022, respectively. 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.

 

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The SBIC license 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.

 

The SBIC Subsidiaries are regulated by the SBA. SBA regulations currently limit the amount that our SBIC Subsidiaries may borrow to a maximum of $175.0 million of SBA debentures when it has at least $87.5 million in regulatory capital, subject to the SBA’s approval. Under current SBIC regulations, for two or more SBICs under common control, the maximum amount of outstanding SBA debentures cannot exceed $350.0 million. Our wholly owned SBIC Subsidiaries are able to borrow funds from the SBA against regulatory capital (which generally approximates equity capital in the respective SBIC) and is subject to customary regulatory requirements, including, but not limited to, periodic examination by the SBA.

 

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 $350.0 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 board of directors, including a majority of our independent directors, approved of our becoming subject to a minimum asset coverage ratio of 150% from 200% under Sections 18(a)(1) and 18(a)(2) of the Investment Company Act, as amended. The 150% asset coverage ratio became effective on April 16, 2019.

 

As of February 28, 2023, SBIC LP had $75.0 million in regulatory capital and $27.0 million SBA-guaranteed debentures outstanding. SBIC II LP had $87.5 million in regulatory capital and $175.0 million SBA-guaranteed debentures outstanding. SBIC III LP had $35.0 million in regulatory capital and $0.0 million SBA-guaranteed debentures outstanding.

 

Unsecured 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, 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 units of the 2022 Notes 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. 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 no longer listed on the NYSE under the trading symbol “SAF” with a par value of $25.00 per note.

 

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.

 

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On August 31, 2021, the Company redeemed $60.0 million aggregate principal amount of the issued and outstanding 6.25% 2025 Notes at par, and the 6.25% 2025 Notes are no longer listed on the NYSE.

 

On June 24, 2020, the Company issued $37.5 million aggregate principal amount of our 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% 2025 Notes. Net proceeds to the Company were $5.4 million after deducting underwriting commissions of approximately $0.2 million. 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 were amortized over the term of the 7.25% 2025 Notes. On July 14, 2022, the Company redeemed $43.1 million in aggregate principal amount of the issued and outstanding 7.25% 2025 Notes. The 7.25% 2025 Notes were listed on the NYSE under the trading symbol of “SAK” and have been delisted following the full redemption on July 14, 2022.

 

On July 14, 2022, the Company redeemed $43.1 million in aggregate principal amount of the issued and outstanding 7.25% 2025 Notes. The 7.25% 2025 Notes were listed on the NYSE under the trading symbol of “SAK” and have been delisted following the full redemption on July 14, 2022.

 

At February 28, 2023, the total 7.25% 2025 Notes outstanding was $0.0 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% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.75% per year. The 7.75% 2025 Notes 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, subject to a fee depending on the date of repayment. 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% 2025 Notes have been capitalized and are being amortized over the term of the Notes. The 7.75% 2025 Notes are not listed and have a par value of $25.00 per note.

 

At February 28, 2023, the total 7.75% 2025 Notes outstanding was $5.0 million.

 

On December 29, 2020, the Company issued $5.0 aggregate principal amount of our 6.25% fixed-rate Notes due in 2027 (the “6.25% 2027 Notes”).  Offering costs incurred were approximately $0.1 million.  Interest on the 6.25% 2027 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 February 28, 2021. The 6.25% 2027 Notes mature on December 29, 2027 and may be redeemed in whole or in part at any time or from time to time at our option, on or after December 29, 2024. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.1 million related to the 6.25% 2027 Notes have been capitalized and are being amortized over the term of the Notes.

 

On January 28, 2021, the Company issued $10.0 million aggregate principal amount of the Second 6.25% 2027 Notes for net proceeds of $9.7 million after deducting underwriting commissions of approximately $0.3 million. Offering costs incurred were approximately $0.1 million. Interest on the 6.25% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year. The 6.25% 2027 Notes mature on January 28, 2027 and commencing January 28, 2023, may be redeemed in whole or in part at any time or from time to time at our option on or after December 29, 2024. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.4 million related to the 6.25% 2027 Notes have been capitalized and are being amortized over the term of the Notes.

 

At February 28, 2023, the total 6.25% 2025 Notes outstanding was $15.0 million.

 

On March 10, 2021, the Company issued $50.0 million aggregate principal amount of the 4.375% 2026 Notes for net proceeds of $49.0 million after deducting underwriting commissions of approximately $1.0 million. Offering costs incurred were approximately $0.2 million.  Interest on the 4.375% 2026 Notes is paid semi-annually in arrears on February 28 and August 28, at a rate of 4.375% per year. The 4.375% 2026 Notes mature on February 28, 2026 and may be redeemed in whole or in part at any time on or after November 28, 2025 at par plus a “make-whole” premium, or thereafter at par. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.2 million related to the 4.375% 2026 Notes have been capitalized and are being amortized over the term of the Notes.

 

99

 

 

On July 15, 2021, the Company issued an additional $125.0 million aggregate principal amount of the Company’s 4.375% 2026 Notes (the “Additional 4.375% 2026 Notes”) for net proceeds for approximately $123.5 million, based on the public offering price of 101.00% of the aggregate principal amount of the Additional 4.375% 2026 Notes, after deducting the underwriting discount of $2.5 million and the offering expenses of approximately $0.2 million payable by the Company. The net proceeds from the offering were used to redeem all of the outstanding 6.25% 2025 Notes (as described above), and for general corporate purposes in accordance with our investment objective and strategies. The Additional 4.375% 2026 Notes were treated as a single series with the existing 4.375% 2026 Notes under the indenture and had the same terms as the existing 4.375% 2026 Notes.

 

At February 28, 2023 the total 4.375% Notes outstanding was $175.0 million.

 

On January 19, 2022, the Company issued $75.0 million aggregate principal amount of our 4.35% fixed-rate Notes due in 2027 (the “4.35% 2027 Notes”) for net proceeds of $73.0 million, based on the public offering price of 99.317% of the aggregate principal amount of the 4.35% 2027 Notes, after deducting the underwriting commissions of approximately $1.5 million. Offering costs incurred were approximately $0.3 million.  Interest on the 4.35% 2027 Notes is paid semi-annually in arrears on February 28 and August 28, at a rate of 4.35% per year, beginning August 28, 2022. The 4.35% 2027 Notes mature on February 28, 2027 and may be redeemed in whole or in part at the Company’s option at any time prior to November 28, 2026, at par plus a “make-whole” premium, and thereafter at par. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.8 million related to the 4.35% 2027 Notes have been capitalized and are being amortized over the term of the Notes.

 

At February 28, 2023 the total 4.35% Notes outstanding was $75.0 million.

 

On April 27, 2022, the Company issued $87.5 million aggregate principal amount of our 6.00% fixed-rate notes due 2027 (the “6.00% 2027 Notes”) for net proceeds of $84.8 million after deducting underwriting commissions of approximately $2.7 million. Offering costs incurred were approximately $0.1 million. On May 10, 2022, the underwriters partially exercised their option to purchase an additional $10.0 million in aggregate principal amount of the 6.00% 2027 Notes. Net proceeds to the Company were $9.7 million after deducting underwriting commissions of approximately $0.3 million. Interest on the 6.00% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.00% per year. The 6.00% 2027 Notes mature on April 30, 2027 and commencing April 27, 2024, 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 $3.3 million related to the 6.00% 2027 Notes have been capitalized and are being amortized over the term of the 6.00% 2027 Notes. The 6.00% 2027 Notes are listed on the NYSE under the trading symbol “SAT” with a par value of $25.00 per note.

 

On August 15, 2022, the Company issued an additional $8.0 million aggregate principal amount of the 6.00% 2027 Notes (the “Additional 6.00% 2027 Notes”) for net proceeds of $7.8 million, based on the public offering price of 97.80% of the aggregate principal amount of the 6.00% 2027 Notes. The Additional 6.00% 2027 Notes are treated as a single series with the existing 6.00% 2027 Notes under the indenture and had the same terms as the existing 6.00% 2027 Notes. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Additional offering costs incurred were approximately $0.03 million. Additional financing costs of $0.03 million related to the 6.00% 2027 Notes have been capitalized and are being amortized over the term of the 6.00% 2027 Notes.

 

At February 28, 2023 the total 6.00% 2027 Notes outstanding was $105.5 million.

 

On September 8, 2022, the Company issued $12.0 million aggregate principal amount of our 7.00% fixed-rate notes due 2025 (the “7.00% 2025 Notes”) for net proceeds of $11.6 million after deducting customary fees and offering expenses of approximately $0.4 million. Interest on the 7.00% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.00% per year. The 7.00% 2025 Notes mature on September 8, 2025 and commencing September 8, 2024, 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 $0.05 million related to the 7.00% 2025 Notes have been capitalized and are being amortized over the term of the 7.00% 2025 Notes.

 

At February 28, 2023 the total 7.00% 2025 Notes outstanding was $12.0 million.

 

On October 27, 2022, the Company issued $40.0 million aggregate principal amount of our 8.00% fixed-rate notes due 2027 (the “8.00% 2027 Notes”) for net proceeds of $38.7 million after deducting underwriting commissions of approximately $1.3 million. Offering costs incurred were approximately $0.1 million. On November 10, 2022, the underwriters partially exercised their option to purchase an additional $6.0 million in aggregate principal amount of the 8.00% 2027 Notes. Net proceeds to the Company were $5.8 million after deducting underwriting commissions of approximately $0.2 million. Interest on the 8.00% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 8.00% per year, beginning February 28, 2023. The 8.00% 2027 Notes mature on October 31, 2027 and commencing October 27, 2024, 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 $1.3 million related to the 8.00% 2027 Notes have been capitalized and are being amortized over the term of the 8.00% 2027 Notes. The 8.00% 2027 Notes are listed on the NYSE under the trading symbol “SAJ” with a par value of $25.00 per note.

 

100

 

 

 At February 28, 2023 the total 8.00% 2027 Notes outstanding was $46.0 million.

 

On December 13, 2022, the Company issued $52.5 million aggregate principal amount of our 8.125% fixed-rate notes due 2027 (the “8.125% 2027 Notes”) for net proceeds of $50.8 million after deducting underwriting commissions of approximately $1.6 million. Offering costs incurred were approximately $0.1 million. On December 21, 2022, the underwriters fully exercised their option to purchase an additional $7.875 million in aggregate principal amount of the 8.125% 2027 Notes. Net proceeds to the Company were $7.6 million after deducting underwriting commissions of approximately $0.2 million. Interest on the 8.125% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 8.125% per year, beginning February 28, 2023. The 8.125% 2027 Notes mature on December 31, 2027 and commencing December 13, 2024, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from this offering were used to make investments in middle-market companies (including investments made through our SBIC subsidiaries) in accordance with our investment objective and strategies and for general corporate purposes. Financing costs of $2.0 million related to the 8.125% 2027 Notes have been capitalized and are being amortized over the term of the 8.125% 2027 Notes. The 8.125% 2027 Notes are listed on the NYSE under the trading symbol “SAY” with a par value of $25.00 per note.

 

At February 28, 2023, the total 8.125% 2027 Notes outstanding was $60.375 million.

 

At February 28, 2023 and February 28, 2022, the fair value of total cash and cash equivalents, cash and cash equivalents in reserve accounts and total investments by major category are as follows:

 

    February 28, 2023     February 28, 2022  
    Fair Value     Percentage of Total     Fair Value     Percentage of Total  
    ($ in thousands)  
Cash and cash equivalents   $ 65,746       6.2 %   $ 47,258       5.4 %
Cash and cash equivalents, reserve accounts     30,330       2.8       5,613       0.6  
First lien term loans     798,534       74.7       631,572       72.6  
Second lien term loans     14,936       1.4       44,386       5.1  
Structured finance securities     41,362       3.9       38,030       4.4  
Unsecured loan     20,661       1.9       15,931       1.8  
Equity interests     97,097       9.1       87,648       10.1  
Total   $ 1,068,666       100.0 %   $ 870,438       100.0 %

 

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.

 

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, we amended our equity distribution agreement to add BB&T Capital Markets and B. Riley FBR, Inc. as sales agents in our ATM offering. 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. This agreement was terminated as of July 29, 2021, and as of that date, we had 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).

 

On July 30, 2021, we entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc. and Compass Point Research and Trading, LLC, each as agents (the “Agents”), through which we may offer for sale, from time to time, up to $150.0 million of our common stock through the Agents, or to them, as principal for their account. As of February 28, 2023, the Company sold 4,840,361 shares for gross proceeds of $123.9 million at an average price of $25.61 for aggregate net proceeds of $122.4 million (net of transaction costs). For the year ended February 28, 2023, there was no activity related to the ATM offerings.

 

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 (the “Share Repurchase Plan”). On October 7, 2015, our board of directors extended the 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, our board of directors extended the 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, our board of directors extended the 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, our board of directors increased the Share Repurchase Plan to 1.3 million shares of common stock. On January 5, 2021, our board of directors extended the Share Repurchase Plan for another year to January 15, 2022, leaving the number of shares unchanged at 1.3 million shares of common stock. On January 4, 2022, our board of directors extended the Share Repurchase Plan for another year to January 15, 2023, leaving the number of shares unchanged. On January 9, 2023, our board of directors extended the Share Repurchase Plan for another year to January 15, 2024, increasing the number of shares to 1.7 million shares of common stock. As of February 28, 2023, the Company purchased 946,627 shares of common stock, at the average price of $21.83 for approximately $20.7 million pursuant to the Share Repurchase Plan. During the three months ended February 28, 2023 the Company purchased 48,594 shares of common stock, at the average price $25.19 for approximately $1.2 million pursuant to the Share Repurchase Plan. During the year ended February 28, 2023 the Company purchased 438,192 shares of common stock, at the average price $24.70 for approximately $10.8 million pursuant to the Share Repurchase Plan.

 

101

 

Dividend Distributions

 

We have distributed or intend to distribute sufficient dividends to eliminate taxable income for our completed tax years. If we fail to satisfy the 90% distribution requirement or otherwise fail to qualify as a RIC in any tax year, we would be subject to tax in that year on all of our taxable income, regardless of whether we made any distributions to our shareholders. Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Our distributions for the tax years ended February 28, 2023 to inception were as follows:

 

Payment date  Cash Dividend 
Tax Year Ended February 28, 2024    
March 30, 2023  $0.69(1)
   $0.69 
Tax Year Ended February 28, 2023     
January 4, 2023  $0.68(2)
September 29, 2022   0.54(3)
June 29, 2022   0.53(4)
March 28, 2022   0.53(5)
   $2.28 
Tax Year Ended February 28, 2022     
January 19, 2022  $0.53(6)
September 28, 2021   0.52(7)
June 29, 2021   0.44(8)
April 22, 2021   0.43(9)
   $1.92 
Tax Year Ended February 28, 2021     
February 10, 2021  $0.42(10)
November 10, 2020   0.41(11)
August 12, 2020   0.40(12)
   $1.03 
Tax Year Ended February 29, 2020     
February 6, 2020  $0.56(13)
September 26, 2019   0.56(14)
June 27, 2019   0.55(15)
March 28, 2019   0.54(16)
   $2.21 
Tax Year Ended February 28, 2019     
January 2, 2019  $0.53(17)
September 27, 2018   0.52(18)
June 27, 2018   0.51(19)
March 26, 2018   0.50(20)
   $2.06 
Tax Year Ended February 28, 2018     
December 27, 2017  $0.49(21)
September 26, 2017   0.48(22)
June 27, 2017   0.47(23)
March 28, 2017   0.46(24)
   $1.90 
Tax Year Ended February 28, 2017     
February 9, 2017  $0.45(25)
November 9, 2016   0.44(26)
September 5, 2016   0.20(27)
August 9, 2016   0.43(28)
April 27, 2016   0.41(29)
   $1.93 
Tax Year Ended February 29, 2016     
February 29, 2016  $0.40(30)
November 30, 2015   0.36(31)
August 31, 2015   0.33(32)
June 5, 2015   1.00(33)
May 29. 2015   0.27(34)
   $2.36 
Tax Year Ended February 28, 2015     
February 27, 2015  $0.22(35)
November 28, 2014   0.18(36)
   $0.40 
Tax Year Ended February 28. 2014     
December 27, 2013  $2.65(37)
   $2.65 
Tax Year Ended February 28, 2013     
December 31, 2012  $4.25(38)
   $4.25 
Tax Year Ended February 29, 2012     
December 30, 2011  $3.00(39)
   $3.00 
Tax Year Ended February 28, 2011     
December 29, 2010  $4.40(40)
   $4.40 
Tax Year Ended February 28, 2010     
December 31, 2009  $18.25(41)
   $18.25 

102

 

 

 

(1) Based on shareholder elections, the dividend consisted of approximately $7.1 million in cash and 46,818 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 $23.11 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on March 17, 20, 21, 22, 23, 24, 27, 28, 29, and 30, 2023.

 

(2) Based on shareholder elections, the dividend consisted of approximately $6.8 million in cash and 53,615 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 $24.26 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on December 20, 21, 22, 23, 27, 28, 29 and 30 2022 and January 3 and 4, 2023.
   
(3) Based on shareholder elections, the dividend consisted of approximately $5.3 million in cash and 52,313 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 $22.00 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on September 16, 19, 20, 21, 22, 23, 26, 27, 28 and 29, 2022.
   
(4) Based on shareholder elections, the dividend consisted of approximately $5.1 million in cash and 48,590 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 $22.40 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on June 15, 16, 17, 21, 22, 23, 24, 27, 28 and 29, 2022.
   
(5) Based on shareholder elections, the dividend consisted of approximately $5.3 million in cash and 42,825 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 $25.89 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on March 15, 16, 17, 18, 21, 22, 23, 24, 25 and 28, 2022.
   
(6) Based on shareholder elections, the dividend consisted of approximately $5.3 million in cash and 41,520 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 $26.85 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on January 5, 6, 7, 10, 11, 12, 13, 14, 18 and 19, 2022.
   
(7) Based on shareholder elections, the dividend consisted of approximately $4.9 million in cash and 38,016 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 $26.77 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on September 15, 16, 17, 20, 21, 22, 23, 24, 27 and 28, 2021.
   
(8) Based on shareholder elections, the dividend consisted of approximately $4.1 million in cash and 33,100 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 $25.03 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on June 16, 17, 18, 21, 22, 23, 24, 25, 28 and 29, 2021.
   
(9) Based on shareholder elections, the dividend consisted of approximately $3.9 million in cash and 38,580 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 $23.69 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on April 9,12, 13, 14, 15, 16, 19, 20, 21 and 22, 2021.
   
(10) Based on shareholder elections, the dividend consisted of approximately $3.8 million in cash and 41,388 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 $21.75 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on January 28, 29 and February 1, 2, 3, 4, 5, 8, 9 and 10, 2021.
   
(11) Based on shareholder elections, the dividend consisted of approximately $3.8 million in cash and 45,706 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 $17.63 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on October 28, 29, 30 and November 2, 3, 4, 5, 6, 9 and 10, 2020.
   
(12) 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 95.0% 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.

 

(13) 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.
   
(14) 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.

 

103

 

 

(15) 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 95.0% 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.
   
(16) 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 95.0% 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.
   
(17) 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.
   
(18) 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.
   
(19) 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% 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.
   
(20) 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 95.0% 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.
   
(21) 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 95.0% 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.
   
(22) 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 95.0% 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.
   
(23) 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 95.0% 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.
   

(24) 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 95.0% 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.
   
(25) 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 95.0% 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.
   
(26) Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,548 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 $17.12 per share, which equaled 95.0% 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.
   
(27) 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 95.0% 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.
   
(28) 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 95.0% 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.

 

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(29) 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 95.0% 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.
   
(30) 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 95.0% 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.
   
(31) 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 95.0% 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.
   
(32) 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 95.0% 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.
   
(33) 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 95.0% 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.
   
(34) 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 95.0% 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.
   

(35) 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 95.0% 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.
   
(36) 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 95.0% 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.
   
(37) 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 equaled the volume weighted average trading price per share of the common stock on December 11, 13 and 16, 2013.
   
(38) 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 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 the volume weighted average trading price per share of the common stock on December 14, 17 and 19, 2012.
   
(39) 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 the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2011.
   
(40) 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 the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2010.
   
(41) 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 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.

 

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Recent Developments:

 

On March 31, 2023 and May 1, 2023, we issued $10.0 million and $10.0 million, respectively, in aggregate principal amount of our 8.75% 2024 Notes for net proceeds in each issuance of approximately $9.6 million after deducting customary fees of 3.50% and offering expenses of approximately $0.1 million. Interest on the 8.75% 2024 Notes will be paid quarterly in arrears on February 28, May 31, August 31 and November 30, beginning on May 31, 2023, at a rate of 8.75% per year. The 8.75% 2024 Notes will mature on March 31, 2024, unless extended to March 31, 2025 at the sole discretion of the Company. The net proceeds from the offering were used make investments in middle-market companies in accordance with our investment objective and strategies (including investments made through SSBIC III LP) and for general corporate purposes.

 

On April 14, 2023, we issued $50.0 million in aggregate principal amount of 8.50% fixed-rate notes due 2028 (the “8.5% 2028 Notes”) for net proceeds of $48.2 million, based on a public offering price of 100% of par, after deducting underwriting discounts and commissions of approximately $1.6 million and estimated offering expenses of approximately $0.2 million. On April 25, 2023, the underwriters exercised their option in full to purchase an additional $7.5 million in aggregate principal amount of its 8.50% notes due 2028 within 30 days. Net proceeds to the Company were $7.3 million after deducting underwriting commissions of approximately $0.2 million. The 8.50% 2028 Notes are listed on the NYSE under the trading symbol “SAZ” with a par value of $25.00 per share. Interest on the 8.50% 2028 Notes will be paid quarterly in arrears on February 28, May 31, August 31 and November 30, beginning on May 31, 2023, at a rate of 8.50% per year. The 8.50% 2028 Notes mature on April 15, 2028 and commencing April 14, 2025, 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 was used to repay a portion of outstanding indebtedness under the Encina Credit Facility, make investments in middle-market companies in accordance with our investment objective and strategies (including investments made through SBIC III LP) and for general corporate purposes.

 

Contractual obligations

 

The following table shows our payment obligations for repayment of debt and other contractual obligations at February 28, 2023:

 

       Payment Due by Period 
Long-Term Debt Obligations  Total   Less Than
1 Year
   1 - 3
Years
   3 - 5
Years
   More Than
5 Years
 
   ($ in thousands) 
Encina credit facility  $32,500   $    -   $32,500   $-   $- 
SBA debentures   202,000    -    15,000    12,000    175,000 
6.00% 2025 Notes   12,000    -    12,000    -    - 
7.75% 2025 Notes   5,000    -    5,000    -    - 
4.375% 2026 Notes   175,000    -    -    175,000    - 
4.35% 2027 Notes   75,000    -    -    75,000    - 
6.00% 2027 Notes   105,500    -    -    105,500    - 
6.25% 2027 Notes   15,000    -    -    15,000    - 
8.00% 2027 Notes   46,000    -    -    46,000    - 
8.125% 2027 Notes   60,375    -    -    60,375    - 
Total Long-Term Debt Obligations  $728,375   $-   $64,500   $488,875   $175,000 

 

Off-balance sheet arrangements

 

At February 28, 2023 and February 28, 2022, the Company’s off-balance sheet arrangements consisted of $108.8 million and $83.4 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.

 

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A summary of the unfunded commitments outstanding as of February 28, 2023 and February 28, 2022 is shown in the table below (dollars in thousands):

 

    February 28,
2023
    February 28,
2022
 
At Company’s discretion            
ActiveProspect, Inc.   $ 10,000     $ -  
Artemis Wax Corp.     -       3,700  
Ascend Software, LLC     5,000       5,000  
Axero Holdings, LLC     -       3,000  
Book4Time, Inc.     -       2,000  
Davisware, LLC     -       2,000  
Granite Comfort, LP     15,000       -  
JDXpert     5,000       -  
LFR Chicken LLC     4,000       10,000  
Netreo Holdings, LLC     -       4,000  
Pepper Palace, Inc.     3,000       3,000  
Procurement Partners, LLC     4,250       2,800  
Saratoga Senior Loan Fund I JV, LLC     8,548       17,500  
Sceptre Hospitality Resources, LLC     5,000       1,000  
Total     59,798        54,000  
                 
At portfolio company’s discretion - satisfaction of certain financial and nonfinancial covenants required                
ARC Health OpCo LLC     10,773                       -  
Artemis Wax Corp.     8,500          
Ascend Software, LLC     3,200       6,500  
Axero Holdings, LLC     -       2,000  
Axero Holdings, LLC - Revolver     500       500  
Davisware, LLC     -       1,000  
Exigo, LLC     4,167          
Exigo, LLC - Revolver     833          
GDS Software Holdings, LLC     -       2,786  
Gen4 Dental Partners Holdings, LLC     11,000       -  
GoReact     2,500       2,500  
HemaTerra Holding Company, LLC     -       -  
JDXpert     1,000       -  
LFR Chicken LLC     -       3,000  
Madison Logic, Inc. - Revolver     -       1,084  
New England Dental Partners     -       4,500  
Passageways, Inc.     -       -  
Pepper Palace, Inc.     2,000       2,000  
Pepper Palace, Inc. - Revolver     2,500       2,500  
Procurement Partners, LLC     1,000       -  
Zollege PBC     1,000       1,000  
      48,973       29,370  
Total   $ 108,771     $ 83,370  

 

The Company believes its assets will provide adequate coverage to satisfy these unfunded commitments. As of February 28, 2023, the Company had cash and cash equivalents of $65.7 million and $31.1 million in available borrowings under the Encina Credit Facility.

  

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ITEM 7A. 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, SOFR, and the prime rate. Substantially all of our portfolio is, and we expect will continue to be, comprised of floating rate investments that utilize LIBOR. Since March 2022, the Federal Reserve has been rapidly raising interest rates and has indicated that it would consider additional rate hikes in response to ongoing inflation concerns. In a rising interest rate environment, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by our investment portfolio. It is possible that the Federal Reserve’s tightening cycle could result the United States into a recession, which would likely decrease interest rates. 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 base rates, such as LIBOR and SOFR, are not offset by corresponding increases in the spread over such base rates that we earn on any portfolio investments, a decrease in 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 SOFR on our Encina Credit Facility. In addition, substantially all of our assets have LIBOR transition language to include the use of an acceptable replacement rate, such as SOFR.

 

At February 28, 2023, we had $695.9 million of borrowings outstanding. There were $32.5 million borrowings outstanding under the Encina Credit Facility as of February 28, 2023. As of February 28, 2023, on a fair value basis, approximately 1% of our debt investments bear interest at a fixed-rate and approximately 1% of our debt investments bear interest at a floating rate. As of February 28, 2023, 0% of our floating rate debt investments are subject to interest rate floors. Additionally, the Encina Credit Facility also is subject to a floating interest rate and is currently paid based on floating LIBOR or Term SOFR rate.

 

We have analyzed the potential impact of changes in interest rates on interest income from investments. Assuming that our investments as of February 28, 2023 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 $8.5 million to our interest income. Conversely, a hypothetical change of a 1.0% decrease in interest rates would cause a corresponding decrease of approximately $8.5 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.

 

108

 

 

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 February 28, 2023.

 

      Increase     (Increase)     Increase     Increase     Increase  
Basis     (Decrease)     Decrease     (Decrease) in Net     (Decrease) in Net     (Decrease) in Net  
Point     in Interest     in Interest     Investment     Investment     Investment  
Change     Income     Expense     Income     Income*     Income per Share  
      ($ in thousands)        
-100     $ (8,514 )   $ 325     $ (8,189 )   $ (6,551 )   $ (0.55 )
-50       (4,257 )     163       (4,094 )     (3,275 )     (0.27 )
-25       (2,129 )     81       (2,048 )     (1,638 )     (0.14 )
25       2,129       (81 )     2,048       1,638       0.14  
50       4,257       (163 )     4,094       3,275       0.27  
100       8,514       (325 )     8,189       6,551       0.55  
200       17,029       (650 )     16,379       13,103       1.09  
300       25,543       (975 )     24,568       19,654       1.64  
400       34,057       (1,300 )     32,757       26,206       2.19  

 

 

*Adjusts Net Interest Income for the impact of the first incentive fee on Net Investment Income

 

The table above assumes no defaults or prepayments by portfolio companies over the next twelve months. The hypothetical results would also be impacted by the changes in the amount of debt outstanding under our Encina Credit Facility, with an increase (decrease) in the debt outstanding under the Encina Credit Facility resulting in an (increase) decrease in the hypothetical interest expense.

 

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our consolidated financial statements are annexed to this Annual Report beginning on page F-1. In addition, the Financial Statements of Saratoga Investment Corp. CLO 2013-1, Ltd. are annexed to this Annual Report beginning on page S-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures 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 Exchange Act). 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 Exchange Act. 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.

 

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Management’s annual report on internal control over financial reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that the receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with polices or procedures may deteriorate.

 

Under the supervision and with participation of our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the Company’s evaluation under the framework in Internal Control—Integrated Framework (2013), management concluded that the Company’s internal control over financial reporting was effective as of February 28, 2023.

 

Changes in internal controls over financial reporting

 

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 our most recently completed fiscal year that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

 

Not applicable.

  

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Director and Executive Officer Information

 

Directors and Executive Officers

 

The following table sets forth the names, ages and positions held by each of our directors, followed by a brief biography of each individual, including the business experience of each individual during the past five years and the specific qualifications that led to the conclusion that each individual should serve as a director.

 

Name  Age  Position  Director Since  Term Expires
Interested Directors            
Christian L. Oberbeck  63  Chairman of the Board, Chief Executive Officer and President  2010  2024
Henri J. Steenkamp  47  Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary  2020  2023
Independent Directors            
Steven M. Looney  73  Director  2007  2025
Charles S. Whitman III  81  Director  2007  2025
G. Cabell Williams  69  Director  2007  2023

 

Christian L. Oberbeck— Mr. Oberbeck has over 36 years of experience in leveraged finance, including acquisition financing, distressed investing, and private equity, and has been involved in originating, structuring, negotiating, consummating, managing, operating, and monitoring minority and control investments in a broad array of businesses. Mr. Oberbeck is the Founder and Managing Member of Saratoga Investment Advisors, LLC, the Company’s investment adviser, and has served as the Chairman of the Board, Chief Executive Officer, and President of the Company since 2010. Mr. Oberbeck is also the Managing Partner of Saratoga Partners, a middle-market private equity investment firm. Prior to assuming full management responsibility for Saratoga Partners in 2008, Mr. Oberbeck had co-managed Saratoga Partners since 1995. Mr. Oberbeck joined Dillon Read and Saratoga Partners from Castle Harlan, Inc., a corporate buyout firm which he had joined at its founding in 1987 and was a Managing Director, leading successful investments in manufacturing and financial services companies. Prior to that, he worked in the Corporate Development Group of Arthur Young and in corporate finance at Blyth Eastman Paine Webber. Mr. Oberbeck has been a director of numerous middle-market companies. Mr. Oberbeck graduated from Brown University in 1982 with a BS in Physics and a BA in Mathematics. In 1985, he earned an MBA from Columbia University. Mr. Oberbeck’s qualifications as a director include his extensive experience in the investment and finance industry, as well as his intimate knowledge of the Company’s operations gained through his service as an executive officer.

 

Steven M. Looney — Mr. Looney has served as member of our Board since 2007. Mr. Looney is a Managing Director of Peale Davies & Co. Inc., a strategic advisory firm specializing in change management and revenue enhancement for middle-market enterprises, is a Director and Audit Chair of ICG Loan Funding Ltd., an investment company specializing in corporate debt, and is a CPA and an attorney. Mr. Looney has served as a consultant and director to numerous companies in the healthcare, manufacturing and services industries. Between 2000 and 2005, he served as Senior Vice President and Chief Financial Officer of PCCI, Inc., a private IT staffing and outsourcing firm. Between 1992 and 2000, Mr. Looney worked at WH Industries as Chief Financial and Administrative Officer. Mr. Looney is a trustee of Excellent Education for Everyone, a nonprofit organization and founder of its affiliate, Education Moms and a director of ICG Loan Funding Ltd., a manager of and investor in collateralized loan portfolios in Europe and the United States. Mr. Looney graduated summa cum laude from the University of Washington with a B.A. degree in accounting and received a J.D. from the University of Washington School of Law where he was a member of the law review. He began his career at the United States Securities and Exchange Commission. Mr. Looney’s qualifications as director include his experience as a Managing Director of Peale Davies & Co., as Chief Financial and Administrative Officer of WH Industries and as General Counsel and Chief Compliance Officer of A.G. Becker-Warburg Paribas Becker, as well as his financial, accounting and legal expertise. 

 

Charles S. Whitman III—Mr. Whitman has served as member of our Board since 2007. Mr. Whitman is senior counsel (retired) at Davis Polk & Wardwell LLP. Mr. Whitman was a partner in Davis Polk’s Corporate Department for 28 years, representing clients in a broad range of corporate finance matters, including shelf registrations, securities compliance for financial institutions, foreign asset privatizations, and mergers and acquisitions. From 1971 to 1973, Mr. Whitman served as Executive Assistant to three successive Chairmen of the SEC. Mr. Whitman graduated from Harvard College and graduated magna cum laude from Harvard Law School with a LL.B. Mr. Whitman also received an LL.M. from Cambridge University in England. Mr. Whitman’s qualifications as director include his 28 years of experience representing clients, including AT&T, Exxon Mobil, General Motors and BP, in securities matters as a partner in Davis Polk’s corporate department. 

 

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Henri J. Steenkamp— Mr. Steenkamp has served as the Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary of the Company since 2014, and as a director of the Company since 2020. Mr. Steenkamp has served as Treasurer and Secretary of Saratoga Investment Advisors LLC, the Company’s investment adviser, since 2014. Mr. Steenkamp has also served as the Chief Financial Officer of MF Global Holdings Ltd., a broker in commodities and derivatives, from April 2011. Prior to that, Mr. Steenkamp held the position of Chief Accounting Officer and Global Controller at MF Global for four years. He joined MF Global, then Man Financial, in 2006 as Vice President of External Reporting and Accounting Policy. After MF Global filed for bankruptcy protection in October 2011, he continued to serve as Chief Financial Officer through January 2013. Before joining MF Global, Mr. Steenkamp spent eight years with PricewaterhouseCoopers (“PwC”), including four years in Transaction Services in its New York office, managing a variety of capital-raising transactions on a global basis. His focus was also on the SEC registration and public company filing process, including technical accounting. He spent four years with PwC in South Africa, where he served as an auditor primarily for SEC registrants and assisted South African companies as they went public in the U.S. Mr. Steenkamp is a chartered accountant and holds an honors degree in Finance. Mr. Steenkamp’s qualifications as a director include his extensive experience in the investment and finance industry, as well as his intimate knowledge of the Company’s operations gained through his service as an executive officer.

 

G. Cabell Williams— Mr. Williams has served as member of our Board since 2007. Mr. Williams has served as the Managing General Partner of Williams and Gallagher, a private equity partnership located in Chevy Chase, Maryland since 2004. Mr. Williams is a Partner, Senior Manager and Director of Farragut Capital Partners, which is a Mezzanine Fund based out of Chevy Chase, Maryland. In 2004, Mr. Williams concluded a 23-year career at Allied Capital Corporation, a business development company based in Washington, DC, which was acquired by Ares Capital Corporation in 2010. While at Allied, Mr. Williams held a variety of positions, including President, CIO and finally Managing Director following Allied’s merger with its affiliates in 1998. From 1991 to 2004, Mr. Williams either led or co-managed the firm’s Private Equity Group. For the nine years prior to 1999, Mr. Williams led Allied’s Mezzanine investment activities. For 15 years, Mr. Williams served on Allied’s Investment Committee where he was responsible for reviewing and approving all of the firm’s investments. Prior to 1991, Mr. Williams ran Allied’s Minority Small Business Investment Company. He also founded Allied Capital Commercial Corporation, a real estate investment vehicle. Mr. Williams has served on the board of directors of various public and private companies. Mr. Williams attended The Landon School, and graduated from Mercersburg Academy and Rollins College, receiving a B.S. in Business Administration from the latter. Mr. Williams’ qualifications as director include his 28 years of experience managing investment activities at Allied Capital, where he served in a variety of positions, including President, CIO and Managing Director.

  

Code of Business Conduct and Ethics

 

We have adopted a Code of Business Conduct and Ethics which applies to, among others, our executive officers, including our principal executive officer and principal financial officer, as well as every officer, director and employee of the Company. Requests for copies should be sent in writing to Saratoga Investment Corp., 535 Madison Avenue, New York, New York 10022. The Company’s Code of Business Conduct and Ethics is also available on our website at www.saratogainvestmentcorp.com.

 

If we make any substantive amendment to, or grant a waiver from, a provision of our Code of Business Conduct and Ethics, we will promptly disclose the nature of the amendment or waiver on our website at www.saratogainvestmentcorp.com.

 

Delinquent Section 16(a) Reports

 

Section 16(a) of the Exchange Act requires the Company’s officers and directors, and persons who own more than 10% of our shares, to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors, and greater than 10% shareholders also are required by SEC rules to furnish the Company with copies of all Section 16(a) forms they file.

 

Based solely on the Company’s review of Forms 3, 4 and 5 filed by such persons and information provided by the Company’s directors and officers, the Company believes that during the year ended February 28, 2023, all Section 16(a) filing requirements applicable to such persons were met in a timely manner, with the following inadvertent exceptions: Christian L. Oberbeck filed late a Form 4 with respect to one transaction in our shares during the reporting period.

 

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Practices and Policies Regarding Hedging, Speculative Trading and Pledging of Securities  

 

Our insider trading policy generally prohibits the Company’s and our Investment Adviser’s directors, officers and employees from engaging in any short-term trading, short sales and other speculative transactions involving our securities, including buying or selling puts or calls or other derivative securities based on our securities. In addition, such persons are generally prohibited under our insider trading policy from entering into hedging or monetization transactions or similar arrangements, as well as pledging our securities in a margin account or as collateral for a loan, except in limited circumstances that are pre-approved by our chief compliance officer.  

 

Nomination of Directors

 

There have been no material changes to the procedures by which stockholders may recommend nominees to our board of directors implemented since the filing of our Proxy Statement for our 2018 Annual Meeting of Stockholders.

 

Audit Committee

 

The current members of the audit committee are Steven M. Looney (Chairman), Charles S. Whitman III and G. Cabell Williams. The board of directors has determined that Mr. Looney is an “audit committee financial expert” as defined under Item 407 of Regulation S-K of the Exchange Act and that each of Messrs. Whitman and Williams are “financially literate” as required by NYSE corporate governance standards. All of these members are independent directors.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Executive Compensation

 

Currently, none of our executive officers are compensated by us. We currently have no employees, and each of our executive officers is also an employee of Saratoga Investment Advisors. Services necessary for our business are provided by individuals who are employees of Saratoga Investment Advisors, pursuant to the terms of the Management Agreement and the Administration Agreement.

 

Director Compensation

 

Our independent directors receive an annual fee of $70,000. They also receive $3,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $1,500 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 $12,500 and the chairman of each other committee receives an annual fee of $6,000 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 NAV or the market price at the time of payment. No compensation is paid to directors who are “interested persons.”

  

The following table sets forth information concerning total compensation earned by or paid to each of our directors during the fiscal year ended February 28, 2023:

 

    Fees Earned or Paid in Cash     Total  
Interested Directors            
Christian L. Oberbeck(1)   $ -     $ -  
Henri J. Steenkamp(1)     -       -  
Independent Directors                
Steven M. Looney   $ 143,000     $ 143,000  
Charles S. Whitman III     135,000       135,000  
G. Cabell Williams     135,000       135,000  

 

 

(1)No compensation was paid to directors who are interested persons of us as defined in the 1940 Act.

 

Compensation Committee Interlocks and Insider Participation

 

The current members of the compensation committee are G. Cabell Williams (Chairman), Steven M. Looney and Charles S. Whitman III. All of these members are independent directors. The compensation committee is responsible for overseeing the Company’s compensation policies generally and making recommendations to the board of directors with respect to incentive compensation and equity-based plans of the Company that are subject to board of directors approval, evaluating executive officer performance and reviewing the Company’s management succession plan, overseeing and setting compensation for the Company’s directors and, as applicable, its executive officers and, as applicable, preparing the report on executive officer compensation that SEC rules require to be included in our Annual Report on Form 10-K. Currently, none of our executive officers are compensated by the Company and as such the compensation committee is not required to produce a report on executive officer compensation for inclusion in our Annual Report on Form 10-K.

 

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During fiscal year ended February 28, 2023 none of the Company’s executive officers served on the board of directors (or a compensation committee thereof or other board committee performing equivalent functions) of any entities that had one or more executive officers serve on the compensation committee or on the board of directors. No current or past executive officers or employees of the Company or its affiliates serve on the compensation committee.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of May 1, 2023, the beneficial ownership of each current director, the nominees for director, the Company’s executive officers, each person known to us to beneficially own 5.0% or more of the outstanding shares of our common stock, and the executive officers and directors as a group.

 

The percentage ownership is based on 12,124,175 shares of common stock outstanding as of May 1, 2022. Shares of common stock that are subject to warrants or other convertible securities currently exercisable or exercisable within 60 days thereof, are deemed outstanding for the purposes of computing the percentage ownership of the person holding these options or convertible securities, but are not deemed outstanding for computing the percentage ownership of any other person. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. To our knowledge, unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned. Unless otherwise indicated by footnote, the address for each listed individual is Saratoga Investment Corp., 535 Madison Avenue, New York, New York 10022.

 

Name of Beneficial Owners  Number of Shares of Common Stock Beneficially Owned   Percent of Class 
Interested Directors        
Christian L. Oberbeck   1,523,516(1)   12.8%
Henri J. Steenkamp   28,459    * 
Independent Directors          
Steven M. Looney   3,758    * 
Charles S. Whitman III   4,029    * 
G. Cabell Williams   81,544    * 
All Directors as a Group   1,641,306    13.8%
Owners of 5% or more of our common stock          
Black Diamond Capital Management, L.L.C.(2)   951,340    8.0%
Elizabeth Oberbeck(3)   549,183    4.6%
Thomas V. Inglesby   350,236    3.0%
Michael J. Grisius   167,216    1.4%

  

 

*Less than 1.0%

 

Mr. Oberbeck, Mr. Grisius and Mr. Inglesby are affiliates who make up 17.2% of the ownership of SAR.

 

(1) Includes 644,248 shares of common stock directly held by Mr. Oberbeck, 217,774 shares of common stock held by CLO Partners LLC, an entity wholly owned by Mr. Oberbeck, 67,465 shares of common stock directly held by Mr. Oberbeck’s children, for which Mr. Oberbeck retains the voting rights, 1,318 shares of common stock directly held by Mr. Oberbeck’s wife, for which Mr. Oberbeck retains the voting rights, and 549,183 shares of common stock directly held by Elizabeth Oberbeck. See footnote 3 below.
   
(2) Based on information included in Form 13F filed by Black Diamond Capital Management, L.L.C. with the SEC on December 31, 2022. The address of Black Diamond Capital Management, L.L.C. 2187 Atlantic Street, 9th floor, Stamford, CT 06902
   
(3) Based on information included in Amendment No. 2 to Schedule 13D filed on January 16, 2020, which amends and supplements the statements on Schedule 13D originally filed with the Securities and Exchange filed jointly by Christian L. Oberbeck, Elizabeth Oberbeck, Saratoga Investment Advisors and CLO Partners LLC on November 4, 2014. Pursuant to an Agreement Relating to Shares of Common Stock of Saratoga Investment Corp. (the “Transfer Agreement”), Christian L. Oberbeck transferred 744,183 shares of common stock beneficially owned by him to Elizabeth Oberbeck. Elizabeth Oberbeck has full ownership rights with respect to the shares, including without limitation, the right to (A) receive any cash and/or stock dividends and distributions paid on or with respect to the shares and (B) sell the shares in accordance with the provisions of the Transfer Agreement and receive all proceeds therefrom. However, pursuant to the terms of the Transfer Agreement, Christian L. Oberbeck has retained the right to vote the shares, except that Elizabeth Oberbeck has retained the right to vote the shares on all matters submitted to shareholders with respect to any matter that could give rise to dissenters or other rights of an objecting shareholder under Maryland General Corporation Law. The Transfer Agreement also contains a right of first refusal that requires Elizabeth Oberbeck to offer Christian L. Oberbeck the opportunity to purchase any shares of Common Stock owned by her prior to her intended sale of the shares. Any such purchases may be made either directly by Mr. Oberbeck or through entities affiliated with him.

 

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Transactions with Related Persons

 

We have entered into a Management Agreement with Saratoga Investment Advisors, LLC. We have also entered into a license agreement with Saratoga Investment Advisors, LLC, pursuant to which Saratoga Investment Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name “Saratoga.” In addition, pursuant to the terms of the Administration Agreement, Saratoga Investment Advisors, LLC provides us with the office facilities and administrative services necessary to conduct our day-to-day operations. Mr. Oberbeck, our chief executive officer, is the primary investor in and controls Saratoga Investment Advisors, LLC.

 

Review, Approval or Ratification of Transactions with Related Persons

 

The Audit Committee of our board is required to review and approve any transactions with related persons (as such term is defined in Item 404 of Regulation S-K).

 

Director Independence

 

In accordance with rules of the NYSE, the board of directors annually determines the independence of each director. No director is considered independent unless the board of directors has determined that he or she has no material relationship with the Company. The Company monitors the status of its directors and officers through the activities of the Company’s Nominating and Corporate Governance Committee and through a questionnaire to be completed by each director no less frequently than annually, with updates periodically if information provided in the most recent questionnaire has changed.

 

In order to evaluate the materiality of any such relationship, the board of directors uses the definition of director independence set forth in the NYSE Listed Company Manual. Section 303A.00 of the NYSE Listed Company Manual provides that business development companies, or BDCs, such as the Company, are required to comply with all of the provisions of Section 303A applicable to domestic issuers other than Sections 303A.02, the section that defines director independence.

 

Section 303A.00 provides that a director of a BDC shall be considered to be independent if he or she is not an “interested person” of the Company, as defined in Section 2(a)(19) of the 1940 Act. Section 2(a)(19) of the 1940 Act defines an “interested person” to include, among other things, any person who has, or within the last two years had, a material business or professional relationship with the Company.

 

The board of directors has determined that each of the directors is independent and has no relationship with the Company, except as a director and stockholder of the Company, with the exception of Messrs. Oberbeck and Grisius who are interested persons of the Company due to their positions as officers of the Company and its Investment Adviser.

 

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Independent Registered Public Accounting Firm

 

For the years ended February 28, 2023 and February 28, 2022, the Company incurred the following fees for services provided by Ernst & Young LLP, including expenses:

 

   Fiscal Year
Ended
February 28,
2023
   Fiscal Year
Ended
February 28,
2022
 
Audit Fees  $584,500   $513,000 
Tax Fees   46,200    43,650 
Total Fees  $630,700   $556,650 

 

In addition to the services listed above, Ernst & Young LLP provided audit services to the Company’s subsidiaries. The following are the related fees:

 

   Fiscal Year
Ended
February 28,
2023
   Fiscal Year
Ended
February 28,
2022
 
CLO Audit Fees  $-   $- 
Tax Services for Company’s Subsidiaries   -    - 
All Other Fees   97,750    89,000 
Total Fees  $97,750   $89,000 

 

Audit Fees. Audit fees include fees for services that normally would be provided by the accountant in connection with statutory and regulatory filings or engagements and that generally only the independent accountant can provide. In addition to fees for the audit of our annual consolidated financial statements, the audit of the effectiveness of our internal control over financial reporting and the review of our quarterly consolidated financial statements in accordance with generally accepted auditing standards, this category contains fees for comfort letters, statutory audits, consents, and assistance with and review of documents filed with the SEC.

 

Tax Fees. Tax fees include services in conjunction with preparation of the Company’s tax return.

 

All Other Fees. Fees for other services would include fees for products and services other than the services reported above.

 

It is the policy of the audit committee to pre-approve all audit, review or attest engagements and permissible non-audit services to be performed by our independent registered public accounting firm.

 

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PART IV

 

ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

 

The following documents are filed or incorporated by reference as part of this Annual Report:

 

1. Consolidated Financial Statements

 

The following consolidated financial statements of the Company are filed herewith: Report of Independent Registered Public Accounting Firm

 

Consolidated Statements of Assets and Liabilities as of February 28, 2023 and February 28, 2022

 

Consolidated Statements of Operations for the years ended February 28, 2023, February 28, 2022 and February 28, 2021

 

Consolidated Schedules of Investments as of February 28, 2023 and February 28, 2022

 

Consolidated Statements of Changes in Net Assets for the years ended February 28, 2023, February 28, 2022 and February 28, 2021

 

Consolidated Statements of Cash Flows for the years ended February 28, 2023, February 28, 2022 and February 28, 2021

 

Notes to Consolidated Financial Statements

 

2. Financial Statement Schedules

 

Reference is made to the Index to Other Financial Statements on page S-1.

  

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3. Exhibits required to be filed by Item 601 of Regulation S-K

 

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:

 

EXHIBIT INDEX

 

Exhibit
Number
  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).
     
3.2   Third Amended and Restated Bylaws of Saratoga Investment Corp. (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 10-Q filed January 6, 2021)
     
4.1   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).
     
4.3   Dividend Reinvestment Plan (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on September 24, 2014).
     
4.4   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 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).
     
4.6   Fifth Supplemental Indenture between Saratoga Investment Corp. and U.S. Bank National Association, as trustee, relating to 7.75% Notes due 2025 (incorporated by reference to Saratoga Investment Corp.’s Quarterly Report  on Form 10-Q, filed on January 10, 2023).   
     
4.7   Seventh Supplemental Indenture between Saratoga Investment Corp. and U.S. Bank National Association, as trustee, relating to 6.25% Notes due 2027 (incorporated by reference to Saratoga Investment Corp.’s Quarterly Report on Form 10-Q, filed on January 10, 2023).   
     
4.8   Eighth Supplemental Indenture between the Saratoga Investment Corp. and U.S. Bank National Association, as trustee, relating to the 4.375% Note due 2026 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 814-00732) filed on March 10, 2021).
     
4.9   Ninth Supplemental Indenture between Saratoga Investment Corp. and U.S. Bank National Association, as trustee, relating to the 4.375% Note due 2027 (incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 814-00732) filed on January 19, 2022).
     
4.10   Tenth  Supplemental Indenture between Saratoga Investment Corp. and U.S. Bank National Association, as trustee, relating to the 6.00% Note due 2027 (incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 814-00732) filed on April 27, 2022).
     
4.11   Eleventh Supplemental Indenture between Saratoga Investment Corp. and U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association), as trustee, relating to the 7.00% Notes due 2025 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, filed on January 10, 2023).   
     
4.12   Twelfth Supplemental Indenture between Saratoga Investment Corp. and U.S. Bank Trust Company, National Association, as trustee, relating to the 8.00% Notes due 2027 (incorporated by reference to the Saratoga Investment Corp.’s Current Report on Form 8-K (File No. 813-00732) filed on October 27, 2022).
     
4.13   Thirteenth Supplemental Indenture between Saratoga Investment Corp. and U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association), as trustee, relating to the 8.125% Notes due 2027 (incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on December 13, 2022).
     
4.14  

Fifteenth Supplemental Indenture between Saratoga Investment Corp. and U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association), as trustee, relating to the 8.50% Notes due 2028 (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on April 14, 2023).

 

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4.15   Form of 7.75% Notes due 2025 (incorporated by reference to Exhibit 4.6 hereto).
     
4.16   Form of 6.25% Notes due 2027 (incorporated by reference to Exhibit 4.7 hereto).
     
4.17   Form of 4.375% Notes due 2026 (incorporated by reference to Exhibit 4.8 hereto).
     
4.18   Form of 4.375% Notes due 2027 (incorporated by reference to Exhibit 4.9 hereto).
     
4.19   Form of 6.00% Notes due 2027 (incorporated by reference to Exhibit 4.10 hereto).
     
4.20   Form of 7.00% Notes due 2027 (incorporated by reference to Exhibit 4.11 hereto).
     
4.21   Form of 8.00% Notes due 2027 (incorporated by reference to Exhibit 4.12 hereto).
     
4.22   Form of 8.125% Notes due 2027 (incorporated by reference to Exhibit 4.13 hereto).
     

4.23

 

Form of 8.50% Notes due 2028 (incorporated by reference to Exhibit 4.15 hereto).

     
4.24*   Description of Securities.
     
10.1   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).
     
10.2   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).
     
10.5   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).
     
10.6   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).
     
10.7   Amended and Restated Collateral Management Agreement, dated February 26, 2021, by and between Saratoga Investment Corp. and Saratoga Investment Corp. CLO 2013-1, Ltd. (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on March 4, 2021).
     
10.8   Amended and Restated Collateral Administration Agreement, dated February 26, 2021, by and between Saratoga Investment Corp., Saratoga Investment Corp. CLO 2013-1, Ltd. and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on March 4, 2021).

 

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10.10   Credit and Security Agreement, dated as of October 4, 2021, by and among Saratoga Investment Funding II, LLC, Saratoga Investment Corp., as collateral manager and equityholder, the lenders party thereto, Encina Lender Finance, LLC, as administrative agent for the secured parties and the collateral agent, and U.S. Bank National Association, as collateral custodian for the secured parties thereto and as collateral administrator (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on October 7, 2021).
     
10.9   Equity Distribution Agreement, dated July 30, 2021, by and among Saratoga Investment Corp. and Saratoga Investment Advisors, LLC, on the one hand, and Ladenburg Thalmann & Co. Inc. and Compass Point Research & Trading, LLC, on the other hand (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on August 2, 2021).
     
10.10   Credit and Security Agreement, dated as of October 4, 2021, by and among Saratoga Investment Funding II, LLC, Saratoga Investment Corp., as collateral manager and equityholder, the lenders party thereto, Encina Lender Finance, LLC, as administrative agent for the secured parties and the collateral agent, and U.S. Bank National Association, as collateral custodian for the secured parties thereto and as collateral administrator (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on October 7, 2021).
     
10.11   First Amendment to the Credit and Security Agreement, dated as of January 27, 2023, by and among Saratoga Investment Fund II LLC, as borrower, Saratoga Investment Corp., as equityholder and as collateral manager, the lenders party thereto, Encina Lender Finance, LLC, as administrative agent and as collateral agent, U.S. Bank National Association, as custodian, and U.S. Bank Trust Company, National Association (successor in interest to U.S. Bank National Association), as collateral administrator (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K, filed on February 2, 2023).
     
10.12   Equity Pledge Agreement, dated as of October 4, 2021, by and between Saratoga Investment Corp. and Encina Lender Finance, LLC, as collateral agent for the secured parties thereto (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on October 7, 2021).
     
10.13   Loan Sale and Contribution Agreement, dated as of October 4, 2021, by and between Saratoga Investment Corp., as seller, and Saratoga Investment Funding II LLC, as purchaser (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on October 7, 2021).
     

10.14

 

Saratoga Senior Loan Fund I JV LLC Limited Liability Company Agreement, dated October 26, 2021, by and between Saratoga Investment Corp. and TJHA JV I LLC (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on October 27, 2021).

     

10.15

 

Note Purchase Agreement by and between Saratoga Investment Corp. and the purchaser party thereto, dated July 9, 2020 (incorporated by reference to Saratoga Investment Corp.’s Quarterly Report on Form 10-Q filed on October 4, 2022).

     
14   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*   List of Subsidiaries.
     
23.1*   Consent of Ernst & Young LLP for Saratoga Investment Corp.
     
23.2*   Consent of CohnReznick LLP for Saratoga Investment Corp. CLO 2013-1, Ltd.
     
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)
     
101.INS   Inline XBRL Instance Document.
     
101.SCH   Inline XBRL Taxonomy Extension Schema Document.
     
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document.
     
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document.
     
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document.
     
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document.
     
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

 

* Filed herewith

 

ITEM 16. FORM 10-K SUMMARY

 

None. 

 

120

 

 

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.

 

  SARATOGA INVESTMENT CORP.
     
Date: May 2, 2023 By: /s/ CHRISTIAN L. OBERBECK
    Christian L. Oberbeck
    Chief Executive Officer
     
  By: /s/ HENRI J. STEENKAMP
    Henri J. Steenkamp
    Chief Financial Officer and Chief Compliance Officer

 

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below hereby constitutes and appoints Christian L. Oberbeck and Henri J. Steenkamp, and each of them (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign this report and any and all amendments thereto, and to file the same, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ CHRISTIAN L. OBERBECK   Chairman of the Board of Directors, Chief Executive   May 2, 2023
Christian L. Oberbeck   Officer (Principal Executive Officer)    
         
/s/ HENRI J. STEENKAMP   Chief Financial Officer (Principal Accounting Officer and   May 2, 2023
Henri J. Steenkamp   Principal Financial Officer), Member of the Board of Directors    
         
/s/ STEVEN M. LOONEY   Member of the Board of Directors   May 2, 2023
Steven M. Looney        
         
/s/ CHARLES S. WHITMAN III   Member of the Board of Directors   May 2, 2023
Charles  S. Whitman III        
         
/s/ G. CABELL WILLIAMS   Member of the Board of Directors   May 2, 2023
Cabell Williams        

 

121

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    PAGE
Reports of Independent Registered Public Accounting Firm (PCAOB No. 00042)   F-2
Consolidated Statements of Assets and Liabilities as of February 28, 2023 and February 28, 2022   F-4
Consolidated Statements of Operations for the years ended February 28, 2023, February 28, 2022 and February 28, 2021   F-5
Consolidated Statements of Changes in Net Assets for the years ended February 28, 2023, February 28, 2022 and February 28, 2021   F-6
Consolidated Statements of Cash Flows for the years ended February 28, 2023, February 28, 2022 and February 28, 2021   F-7
Consolidated Schedule of Investment for the year ended February 28, 2023, February 28, 2022   F-8
Notes to Consolidated Financial Statements   F-32

 

F-1

 

 

Report of Independent Registered Public Accounting Firm

 

The Shareholders and the Board of Directors of Saratoga Investment Corp.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated statements of assets and liabilities of Saratoga Investment Corp. (the Company), including the consolidated schedules of investments, as of February 28, 2023 and February 28, 2022, the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended February 28, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 28, 2023 and February 28, 2022, and the results of its operations, changes in its net assets and its cash flows for each of the three years in the period ended February 28, 2023, in conformity with U.S. generally accepted accounting principles.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of February 28, 2023 and February 28, 2022 by correspondence with the portfolio companies, custodians and debt agents. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

F-2

 

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which is relates.

 

Valuation of investments using significant unobservable inputs
 
Description of the Matter  

At February 28, 2023, the fair value of the Company’s investments categorized in Level 3 of the fair value hierarchy (Level 3 investments) totaled $959,483,302. Management determines the fair value of these investments by applying the valuation techniques described in Notes 2 and 3 to the consolidated financial statements and using significant unobservable inputs and assumptions. The selection of the valuation techniques and the significant unobservable inputs and assumptions used by management requires subjective judgments and estimates. The valuation techniques used by the Company include market comparables, collateral value coverage, discounted cash flows and enterprise value waterfalls. The significant unobservable inputs used to measure fair value include market yields, EBITDA multiples, revenue multiples, net asset value, third-party bids, discount rates, recovery rates and prepayment rates.

 

Auditing the fair value of the Company’s Level 3 investments was complex and involved auditor judgment, as the valuation techniques selected and the significant unobservable inputs and assumptions used by the Company are highly judgmental and require estimation, and the selection of such techniques, inputs and assumptions has a significant effect on the fair value measurement of such investments.

 

How We Addressed the Matter in Our Audit  

To test the valuation of the Company’s Level 3 investments, we gained an understanding of the valuation techniques, significant unobservable inputs and assumptions used by the Company to value the Level 3 investments and reviewed the information considered by the Board of Directors relating to the fair value of each investment. For a sample of Level 3 investments, we evaluated the valuation techniques used, tested the significant unobservable inputs and assumptions, and tested the mathematical accuracy of the related valuation models. For this sample of Level 3 investments, we agreed the significant inputs and underlying data used in the Company’s valuations (for example, deal terms, portfolio company operating results, market yields, third-party bids) to transaction agreements, most recently available portfolio company financial statements or other financial information, information available from third-party sources and market data, as applicable. We involved our valuation specialists to assist in developing independent estimates of fair value for a sample of investments by using portfolio company and market information, and we compared such estimates to the Company’s fair value of these investments. We also searched for and evaluated information that corroborated or contradicted the Company’s valuations of Level 3 investments.

 

 

/s/ Ernst & Young LLP  
   
We have served as the Company’s auditor since 2006.  
   
New York, New York  
May 2, 2023  

 

F-3

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

Saratoga Investment Corp.

Consolidated Statements of Assets and Liabilities

 

   February 28,
2023
   February 28,
2022
 
         
ASSETS        
Investments at fair value        
Non-control/Non-affiliate investments (amortized cost of $819,966,208 and $654,965,044, respectively)  $828,028,800   $668,358,516 
Affiliate investments (amortized cost of $25,722,320 and $46,224,927, respectively)   28,305,871    48,234,124 
Control investments (amortized cost of $120,800,829 and $95,058,356, respectively)   116,255,582    100,974,715 
Total investments at fair value (amortized cost of $966,489,357 and $796,248,327, respectively)   972,590,253    817,567,355 
Cash and cash equivalents   65,746,494    47,257,801 
Cash and cash equivalents, reserve accounts   30,329,779    5,612,541 
Interest receivable (net of reserve of $2,217,300 and $0, respectively)   8,159,951    5,093,561 
Due from affiliate (See Note 7)   
-
    90,968 
Management fee receivable   363,809    362,549 
Other assets   531,337    254,980 
Current tax receivable   436,551    
-
 
Total assets  $1,078,158,174   $876,239,755 
           
LIABILITIES          
Revolving credit facility  $32,500,000   $12,500,000 
Deferred debt financing costs, revolving credit facility   (1,344,005)   (1,191,115)
SBA debentures payable   202,000,000    185,000,000 
Deferred debt financing costs, SBA debentures payable   (4,923,488)   (4,344,983)
7.00% Notes Payable 2025   12,000,000    
-
 
Discount on 7.00% notes payable 2025   (304,946)   
-
 
Deferred debt financing costs, 7.00% notes payable 2025   (40,118)   
-
 
7.25% Notes Payable 2025   
-
    43,125,000 
Deferred debt financing costs, 7.25% notes payable 2025   
-
    (1,078,201)
7.75% Notes Payable 2025   5,000,000    5,000,000 
Deferred debt financing costs, 7.75% notes payable 2025   (129,528)   (184,375)
4.375% Notes Payable 2026   175,000,000    175,000,000 
Premium on 4.375% notes payable 2026   830,824    1,086,013 
Deferred debt financing costs, 4.375% notes payable 2026   (2,552,924)   (3,395,435)
4.35% Notes Payable 2027   75,000,000    75,000,000 
Discount on 4.35% notes payable 2027   (408,932)   (499,263)
Deferred debt financing costs, 4.35% notes payable 2027   (1,378,515)   (1,722,908)
6.25% Notes Payable 2027   15,000,000    15,000,000 
Deferred debt financing costs, 6.25% notes payable 2027   (344,949)   (416,253)
6.00% Notes Payable 2027   105,500,000    
-
 
Discount on 6.00% notes payable 2027   (159,334)   
-
 
Deferred debt financing costs, 6.00% notes payable 2027   (2,926,637)   
-
 
8.00% Notes Payable 2027   46,000,000    
-
 
Deferred debt financing costs, 8.00% notes payable 2027   (1,622,376)   
-
 
8.125% Notes Payable 2027   60,375,000    
-
 
Deferred debt financing costs, 8.125% notes payable 2027   (1,944,536)   
-
 
Base management and incentive fees payable   12,114,878    12,947,025 
Deferred tax liability   2,816,572    1,249,015 
Accounts payable and accrued expenses   1,464,343    799,058 
Current income tax payable   
-
    2,820,036 
Interest and debt fees payable   3,652,936    2,801,621 
Directors fees payable   14,932    70,000 
Due to manager   10,935    263,814 
Excise tax payable   
-
    630,183 
Total liabilities   731,200,132    520,459,232 
           
Commitments and contingencies (See Note 9)   
 
    
 
 
           
NET ASSETS          
Common stock, par value $0.001, 100,000,000 common shares authorized, 11,890,500 and 12,131,350 common shares issued and outstanding, respectively   11,891    12,131 
Capital in excess of par value   321,893,806    328,062,246 
Total distributable earnings   25,052,345    27,706,146 
Total net assets   346,958,042    355,780,523 
Total liabilities and net assets  $1,078,158,174   $876,239,755 
NET ASSET VALUE PER SHARE  $29.18   $29.33 

 

See accompanying notes to consolidated financial statements.

 

F-4

 

 

Saratoga Investment Corp.

Consolidated Statements of Operations

 

   For the year ended 
   February 28,
2023
   February 28,
2022
   February 28,
2021
 
INVESTMENT INCOME            
Interest from investments            
Interest income:            
Non-control/Non-affiliate investments  $72,677,237   $46,369,544   $41,621,899 
Affiliate investments   4,773,527    3,308,471    1,656,263 
Control investments   6,602,594    7,345,691    5,848,980 
Payment-in-kind interest income:               
Non-control/Non-affiliate investments   359,910    1,150,695    2,251,499 
Affiliate investments   416,711    
-
    172,626 
Control investments   386,889    327,171    162,658 
Total interest from investments   85,216,868    58,501,572    51,713,925 
Interest from cash and cash equivalents   1,368,489    3,584    14,609 
Management fee income   3,269,820    3,262,591    2,507,626 
Dividend Income   2,720,272    1,925,791    158,045 
Structuring and advisory fee income   3,585,061    4,307,647    2,157,405 
Other income   2,943,610    2,739,372    1,098,646 
Total investment income   99,104,120    70,740,557    57,650,256 
                
OPERATING EXPENSES               
Interest and debt financing expenses   33,498,489    19,880,693    13,587,201 
Base management fees   16,423,960    11,901,729    9,098,495 
Incentive management fees expense (benefit)   5,057,117    11,794,208    4,903,499 
Professional fees   1,812,259    1,378,134    1,705,942 
Administrator expenses   3,160,417    2,906,250    2,545,833 
Insurance   347,483    348,671    285,529 
Directors fees and expenses   360,000    335,596    290,000 
General and administrative   2,328,672    1,661,932    1,428,293 
Income tax expense (benefit)   (152,956)   (39,649)   667 
Excise tax expense (credit)   1,067,532    630,183    691,672 
Total operating expenses   63,902,973    50,797,747    34,537,131 
NET INVESTMENT INCOME   35,201,147    19,942,810    23,113,125 
                
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS               
Net realized gain (loss) from investments:               
Non-control/Non-affiliate investments   7,446,596    6,209,737    22,207 
Affiliate investments   
-
    7,328,457    (8,726,013)
Control investments   
-
    (139,867)   
-
 
Net realized gain (loss) from investments   7,446,596    13,398,327    (8,703,806)
Income tax (provision) benefit from realized gain on investments   548,568    (2,886,444)   (3,895,354)
Net change in unrealized appreciation (depreciation) on investments:               
Non-control/Non-affiliate investments   (5,330,880)   14,775,190    (3,817,921)
Affiliate investments   574,354    (26,836)   7,549,096 
Control investments   (10,461,606)   2,271,639    1,235,147 
Net change in unrealized appreciation (depreciation) on investments   (15,218,132)   17,019,993    4,966,322 
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   (1,715,333)   694,908    (574,634)
Net realized and unrealized gain (loss) on investments   (8,938,301)   28,226,784    (8,207,472)
Realized losses on extinguishment of debt   (1,587,083)   (2,434,410)   (128,617)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $24,675,763   $45,735,184   $14,777,036 
                
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
  $2.06   $3.99   $1.32 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED
   11,963,533    11,456,631    11,188,629 

 

See accompanying notes to consolidated financial statements.

 

F-5

 

 

Saratoga Investment Corp.

Consolidated Statements of Changes in Net Assets

 

   For the year ended 
   February 28,
2023
   February 28,
2022
   February 28,
2021
 
INCREASE (DECREASE) FROM OPERATIONS:            
Net investment income  $35,201,147   $19,942,810   $23,113,125 
Net realized gain from investments   7,446,596    13,398,327    (8,703,806)
Realized losses on extinguishment of debt   (1,587,083)   (2,434,410)   (128,617)
Income tax (provision) benefit from realized gain on investments   548,568    (2,886,444)   (3,895,354)
Net change in unrealized appreciation (depreciation) on investments   (15,218,132)   17,019,993    4,966,322 
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   (1,715,333)   694,908    (574,634)
Net increase (decrease) in net assets resulting from operations   24,675,763    45,735,184    14,777,036 
                
DECREASE FROM SHAREHOLDER DISTRIBUTIONS:               
Total distributions to shareholders   (27,313,402)   (22,033,235)   (13,746,998)
Net decrease in net assets from shareholder distributions   (27,313,402)   (22,033,235)   (13,746,998)
                
CAPITAL SHARE TRANSACTIONS:               
Proceeds from issuance of common stock   
-
    26,835,203    - 
Stock dividend distribution   4,648,262    3,875,206    2,481,084 
Repurchases of common stock   (10,824,340)   (2,545,037)   (3,608,459)
Repurchase fees   (8,764)   (1,992)   (3,746)
Offering costs   
-
    (270,576)   - 
Net increase (decrease) in net assets from capital share transactions   (6,184,842)   27,892,804    (1,131,121)
Total increase (decrease) in net assets   (8,822,481)   51,594,753    (101,083)
Net assets at beginning of period   355,780,523    304,185,770    304,286,853 
Net assets at end of period  $346,958,042   $355,780,523   $304,185,770 

 

See accompanying notes to consolidated financial statements.

 

F-6

 

 

Saratoga Investment Corp.

Consolidated Statements of Cash Flows

 

   For the year ended 
   February 28,
2023
   February 28,
2022
   February 28,
2021
 
Operating activities            
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $24,675,763   $45,735,184   $14,777,036 
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   1,882,734    349,292    973,606 
Net accretion of discount on investments   (1,816,934)   (2,043,088)   (1,390,128)
Amortization of deferred debt financing costs   3,587,139    2,164,761    1,372,662 
Realized losses on extinguishment of debt   1,587,083    2,434,410    128,617 
Income tax expense (benefit)   (152,956)   21,260    667 
Net realized (gain) loss from investments   (7,446,596)   (13,398,327)   8,703,806 
Net change in unrealized (appreciation) depreciation on investments   15,218,132    (17,019,993)   (4,966,322)
Net change in provision for deferred taxes on unrealized appreciation (depreciation) on investments   1,715,333    (694,908)   574,634 
Proceeds from sales and repayments of investments   222,215,062    226,931,104    130,259,061 
Purchases of investments   (385,075,296)   (458,073,629)   (202,260,764)
(Increase) decrease in operating assets:               
Interest receivable   (3,066,390)   (869,931)   586,826 
Due from affiliate   90,968    2,628,032    (2,719,000)
Management fee receivable   (1,260)   (327,905)   237,563 
Other assets   (276,357)   692,335    (265,997)
Current income tax receivable   (436,551)   -    - 
Increase (decrease) in operating liabilities:               
Base management and incentive fees payable   (832,147)   6,390,351    (9,243,423)
Accounts payable and accrued expenses   665,285    (951,208)   37,109 
Current tax payable   (2,820,036)   2,820,036    - 
Interest and debt fees payable   851,315    155,837    411,742 
Directors fees payable   (55,068)   (500)   9,000 
Excise tax payable   (630,183)   (61,489)   691,672 
Due to manager   (252,879)   (15,251)   (264,777)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   (130,373,839)   (203,133,627)   (62,346,410)
                
Financing activities               
Borrowings on debt   113,000,000    135,000,000    41,000,000 
Paydowns on debt   (76,000,000)   (95,500,000)   (33,000,000)
Issuance of notes   223,875,000    250,000,000    63,125,000 
Repayments of notes   (43,125,000)   (60,000,000)   - 
Payments of deferred debt financing costs   (10,135,986)   (10,008,424)   (3,435,749)
Discount on debt issuance, 6.00% notes 2027
   (176,000)   
-
    - 
Discount on debt issuance, 7.00% notes 2025
   (360,000)   
-
    - 
Premium on debt issuance, 4.375% notes 2026   
-
    1,250,000    - 
Discount on debt issuance, 4.35% notes 2027   -    (512,250)   - 
Proceeds from issuance of common stock   
-
    26,835,203    - 
Payments of cash dividends   (22,665,140)   (18,158,029)   (11,265,914)
Repurchases of common stock   (10,824,340)   (2,545,037)   (3,608,459)
Repurchases fees   (8,764)   (1,992)   (3,746)
Payments of offering costs   
-
    (270,576)   - 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   173,579,770    226,088,895    52,811,132 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS   43,205,931    22,955,268    (9,535,278)
CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, BEGINNING OF PERIOD   52,870,342    29,915,074    39,450,352 
CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, END OF PERIOD  $96,076,273   $52,870,342   $29,915,074 
                
Supplemental information:               
Interest paid during the period  $28,904,198   $17,560,094   $11,802,800 
Cash paid for taxes   2,770,984    1,355,083    4,140,241 
Supplemental non-cash information:               
Payment-in-kind interest income and other adjustments to cost   (1,882,734)   (349,292)   (973,606)
Net accretion of discount on investments   1,816,934    2,043,088    1,390,128 
Amortization of deferred debt financing costs   3,587,139    2,164,761    1,372,662 
Stock dividend distribution   4,648,262    3,875,206    2,481,084 

 

See accompanying notes to consolidated financial statements.

 

F-7

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

Company(1)   Industry   Investment Interest Rate/
Maturity
  Original Acquisition Date   Principal/
Number of Shares
    Cost     Fair Value (c)     % of
Net Assets
 
Non-control/Non-affiliate investments - 238.5% (b)                                    
Altvia MidCo, LLC.   Alternative Investment Management Software   First Lien Term Loan
(3M USD TERM SOFR+8.50%), 13.39% Cash, 7/18/2027
  7/18/2022   $ 7,980,000     $ 7,907,457     $ 7,911,372       2.3 %
Altvia MidCo, LLC. (h)   Alternative Investment Management Software   Series A-1 Preferred Shares   7/18/2022     2,000,000       2,000,000       2,548,000       0.7 %
        Total Alternative Investment Management Software                 9,907,457       10,459,372       3.0 %
Artemis Wax Corp. (d)(j)   Consumer Services   Delayed Draw Term Loan
(1M USD TERM SOFR+6.75%), 11.41% Cash, 5/20/2026
  5/20/2021   $ 57,500,000       57,059,057       57,500,000       16.6 %
Artemis Wax Corp. (h)   Consumer Services   Series B-1 Preferred Stock   5/20/2021     934,463       1,500,000       4,642,322       1.3 %
Artemis Wax Corp. (h)   Consumer Services   Series D Preferred Stock   12/22/2022     278,769       1,500,000       1,500,005       0.4 %
        Total Consumer Services                 60,059,057       63,642,327       18.3 %
Schoox, Inc. (h), (i)   Corporate Education Software   Series 1 Membership Interest   12/8/2020     1,050       475,698       3,809,091       1.1 %
        Total Corporate Education Software                 475,698       3,809,091       1.1 %
GreyHeller LLC (h)   Cyber Security   Common Stock   11/10/2021     7,857,689       1,906,275       2,509,210       0.7 %
        Total Cyber Security                 1,906,275       2,509,210       0.7 %

 

F-8

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
New England Dental Partners  Dental Practice Management  First Lien Term Loan
(3M USD LIBOR+8.00%), 12.97% Cash, 11/25/2025
  11/25/2020  $6,555,000    6,514,437    6,523,536    1.9%
New England Dental Partners  Dental Practice Management  Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 12.97% Cash, 11/25/2025
  11/25/2020  $4,650,000    4,627,032    4,627,680    1.3%
Gen4 Dental Partners Holdings, LLC (j)  Dental Practice Management  Delayed Draw Term Loan
(3M USD TERM SOFR+10.35%), 15.24% Cash, 4/29/2026
  2/8/2023  $
-
    (94,504)   
-
    0.0%
Gen4 Dental Partners Holdings, LLC (i)  Dental Practice Management  Series A Preferred Units  2/8/2023   480,769    1,000,000    1,000,000    0.3%
      Total Dental Practice Management           12,046,965    12,151,216    3.5%
Exigo, LLC (d)  Direct Selling Software  First Lien Term Loan
(1M USD LIBOR+5.75%), 10.42% Cash, 3/16/2027
  3/16/2022  $24,812,500    24,632,494    24,504,825    7.1%
Exigo, LLC (j)  Direct Selling Software  Delayed Draw Term Loan
(1M USD LIBOR+5.75%), 10.42% Cash, 3/16/2027
  3/16/2022  $
-
    
-
    (51,667)   0.0%
Exigo, LLC (j)  Direct Selling Software  Revolving Credit Facility
(1M USD LIBOR+5.75%), 10.42% Cash, 3/16/2027
  3/16/2022  $208,334    208,333    195,417    0.1%
Exigo, LLC (h), (i)  Direct Selling Software  Common Units  3/16/2022   1,041,667    1,041,667    1,121,575    0.3%
      Total Direct Selling Software           25,882,494    25,770,150    7.5%
C2 Educational Systems (d)  Education Services  First Lien Term Loan
(3M USD LIBOR+8.50%), 13.47% Cash, 5/31/2023
  5/31/2017  $18,500,000    18,497,146    18,525,900    5.3%
C2 Education Systems, Inc. (h)  Education Services  Series A-1 Preferred Stock  5/18/2021   3,127    499,904    629,892    0.2%
Zollege PBC  Education Services  First Lien Term Loan
(3M USD LIBOR+7.00%), 11.97% Cash, 5/11/2026
  5/11/2021  $16,000,000    15,905,830    14,827,200    4.3%
Zollege PBC (j)  Education Services  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 11.97% Cash, 5/11/2026
  5/11/2021  $500,000    496,809    390,050    0.1%
Zollege PBC (h)  Education Services  Class A Units  5/11/2021   250,000    250,000    115,676    0.0%
      Total Education Services           35,649,689    34,488,718    9.9%
Destiny Solutions Inc. (h), (i)  Education Software  Limited Partner Interests  5/16/2018   3,068    3,969,291    8,941,350    2.6%

 

F-9

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
GoReact  Education Software  First Lien Term Loan
(3M USD TERM SOFR+7.50%), 13.59% Cash, 1/17/2025
  1/17/2020  $8,006,000    7,952,042    7,982,783    2.3%
GoReact (j)  Education Software  Delayed Draw Term Loan
(3M USD TERM SOFR+7.50%), 13.59% Cash, 1/17/2025
  1/18/2022  $1,000,750    1,000,750    997,848    0.3%
Identity Automation Systems (h)  Education Software  Common Stock Class A-2 Units  8/25/2014   232,616    232,616    218,168    0.1%
Identity Automation Systems (h)  Education Software  Common Stock Class A-1 Units  3/6/2020   43,715    171,571    217,370    0.1%
Ready Education  Education Software  First Lien Term Loan
(3M USD TERM SOFR+6.00%), 10.89% Cash, 8/5/2027
  8/5/2022  $27,000,000    26,751,573    26,597,700    7.7%
      Total Education Software           40,077,843    44,955,219    13.1%
TG Pressure Washing Holdings, LLC (h)  Facilities Maintenance  Preferred Equity  8/12/2019   488,148    488,148    407,760    0.1%
      Total Facilities Maintenance           488,148    407,760    0.1%
Davisware, LLC  Field Service Management  First Lien Term Loan
(3M USD TERM SOFR+7.00%), 11.89% Cash, 7/31/2024
  9/6/2019  $6,000,000    5,972,735    5,988,000    1.7%
Davisware, LLC  Field Service Management  Delayed Draw Term Loan
(3M USD TERM SOFR+7.00%), 11.89% Cash, 7/31/2024
  9/6/2019  $3,977,790    3,950,992    3,969,834    1.1%
      Total Field Service Management           9,923,727    9,957,834    2.8%
B. Riley Financial, Inc. (a)  Financial Services  Senior Unsecured Loan
6.75% Cash, 5/31/2024
  10/18/2022  $165,301    165,301    160,077    0.0%
GDS Software Holdings, LLC  Financial Services  First Lien Term Loan
(3M USD LIBOR+7.00%), 11.97% Cash, 12/30/2026
  12/30/2021  $22,713,926    22,603,970    22,311,890    6.4%
GDS Software Holdings, LLC  Financial Services  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 11.97% Cash, 12/30/2026
  12/30/2021  $3,286,074    3,257,297    3,227,910    0.9%

 

F-10

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
GDS Software Holdings, LLC (h)  Financial Services  Common Stock Class A Units  8/23/2018   250,000    250,000    518,413    0.1%
      Total Financial Services           26,276,568    26,218,290    7.4%
Ascend Software, LLC  Financial Services Software  First Lien Term Loan
(3M USD LIBOR+7.50%), 12.47% Cash, 12/15/2026
  12/15/2021  $6,000,000    5,952,354    5,902,200    1.7%
Ascend Software, LLC (j)   Financial Services Software   Delayed Draw Term Loan
(3M USD LIBOR+7.50%), 12.47% Cash, 12/15/2026
  12/15/2021   $3,300,000    3,269,283    3,194,050    0.9%
      Total Financial Services Software           9,221,637    9,096,250    2.6%
Axiom Parent Holdings, LLC (h)  Healthcare Services  Common Stock Class A Units  6/19/2018  $400,000    400,000    1,286,156    0.4%
ComForCare Health Care (d)  Healthcare Services  First Lien Term Loan
(3M USD LIBOR+6.25%), 11.22% Cash, 1/31/2025
  1/31/2017  $25,000,000    24,938,666    25,000,000    7.2%
      Total Healthcare Services           25,338,666    26,286,156    7.6%
HemaTerra Holding Company, LLC (d)  Healthcare Software  First Lien Term Loan
(1M USD TERM SOFR+8.25%), 12.91% Cash, 1/31/2027
  4/15/2019  $55,483,943    55,105,372    55,445,104    16.0%
HemaTerra Holding Company, LLC  Healthcare Software  Delayed Draw Term Loan
(1M USD TERM SOFR+8.25%), 12.91% Cash, 1/31/2027
  4/15/2019  $13,895,175    13,829,142    13,885,448    4.0%
TRC HemaTerra, LLC (h)  Healthcare Software  Class D Membership Interests  4/15/2019   2,487    2,816,693    4,606,741    1.3%
Procurement Partners, LLC  Healthcare Software  First Lien Term Loan
(3M USD TERM SOFR+6.50%), 11.39% Cash, 5/12/2026
  11/12/2020  $35,125,000    34,906,981    35,103,925    10.1%
Procurement Partners, LLC (j)  Healthcare Software  Delayed Draw Term Loan
(3M USD TERM SOFR+6.50%), 11.39% Cash, 5/12/2026
  11/12/2020  $9,300,000    9,219,412    9,294,420    2.7%
Procurement Partners Holdings LLC (h)  Healthcare Software  Class A Units  11/12/2020   571,219    571,219    788,283    0.2%
      Total Healthcare Software           116,448,819    119,123,921    34.3%
Roscoe Medical, Inc. (h)  Healthcare Supply  Common Stock  3/26/2014   5,081    508,077    
-
    0.0%
      Total Healthcare Supply           508,077    
-
    0.0%

 

F-11

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Book4Time, Inc. (a), (d)  Hospitality/Hotel  First Lien Term Loan
(3M USD LIBOR+7.50%), 12.47%, 12/22/2025
  12/22/2020  $3,136,517    3,116,896    3,136,517    0.9%
Book4Time, Inc. (a)  Hospitality/Hotel  Delayed Draw Term Loan
(3M USD LIBOR+7.50%), 12.47%, 12/22/2025
  12/22/2020  $2,000,000    1,984,212    2,000,000    0.6%
Book4Time, Inc. (a), (h), (i)  Hospitality/Hotel  Class A Preferred Shares  12/22/2020   200,000    156,826    281,778    0.1%
Knowland Group, LLC (h), (k)  Hospitality/Hotel  Second Lien Term Loan
(3M USD LIBOR+8.00%), 13.97% Cash/1.00% PIK, 5/9/2024
  11/9/2018  $15,878,989    15,878,989    9,760,821    2.8%
Sceptre Hospitality Resources, LLC  Hospitality/Hotel  First Lien Term Loan
(3M USD TERM SOFR+7.25%), 12.14% Cash, 11/15/2027
  4/27/2020  $23,000,000    22,806,316    22,793,000    6.6%
Sceptre Hospitality Resources, LLC (j)  Hospitality/Hotel  Delayed Draw Term Loan
(3M USD TERM SOFR+7.25%), 12.14% Cash, 11/15/2027
  9/2/2021  $
-
    
-
    
-
    0.0%
      Total Hospitality/Hotel           43,943,239    37,972,116    11.0%
Granite Comfort, LP (d)  HVAC Services and Sales  First Lien Term Loan
(3M USD TERM SOFR+7.86%), 12.75% Cash, 11/16/2025
  11/16/2020  $43,000,000    42,694,831    42,570,000    12.3%
Granite Comfort, LP (j)  HVAC Services and Sales  Delayed Draw Term Loan
(3M USD TERM SOFR+7.86%), 12.75% Cash, 11/16/2025
  11/16/2020  $12,000,000    11,894,177    11,880,000    3.4%
      Total HVAC Services and Sales           54,589,008    54,450,000    15.7%

 

F-12

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Vector Controls Holding Co., LLC (d)  Industrial Products  First Lien Term Loan
(3M USD LIBOR+6.50%), 11.47% Cash, 3/6/2025
  3/6/2013  $3,089,986    3,089,986    3,089,986    0.9%
Vector Controls Holding Co., LLC (h)  Industrial Products  Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027  5/31/2015   343    
-
    6,517,923    1.9%
      Total Industrial Products           3,089,986    9,607,909    2.8%
AgencyBloc, LLC  Insurance Software  First Lien Term Loan
(1M USD BSBY+8.00%), 12.58% Cash, 10/1/2026
  10/1/2021  $13,469,318    13,376,121    13,449,114    3.9%
Panther ParentCo LLC (h)  Insurance Software  Class A Units  10/1/2021   2,500,000    2,500,000    3,311,442    1.0%
      Total Insurance Software           15,876,121    16,760,556    4.9%
LogicMonitor, Inc. (d)  IT Services  First Lien Term Loan
(3M USD TERM SOFR+6.50%), 11.39% Cash, 5/17/2026
  3/20/2020  $43,000,000    42,953,087    43,000,000    12.4%
      Total IT Services           42,953,087    43,000,000    12.4%
ActiveProspect, Inc. (d)  Lead Management Software  First Lien Term Loan
(3M USD LIBOR+6.00%), 10.97% Cash, 8/8/2027
  8/8/2022  $12,000,000    11,906,362    12,090,000    3.5%
ActiveProspect, Inc. (j)  Lead Management Software  Delayed Draw Term Loan
(3M USD LIBOR+6.00%), 10.97% Cash, 8/8/2027
  8/8/2022  $
-
    
-
    
-
    0.0%
      Total Lead Management Software           11,906,362    12,090,000    3.5% 

 

F-13

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

Company(1)   Industry   Investment Interest Rate/
Maturity
  Original Acquisition Date   Principal/
Number of Shares
    Cost     Fair Value (c)     % of
Net Assets
 
Centerbase, LLC   Legal Software   First Lien Term Loan
(1M USD TERM SOFR+7.75%), 12.41% Cash, 1/18/2027
  1/18/2022   $ 21,247,440       21,055,931       20,699,256       6.0 %
        Total Legal Software                 21,055,931       20,699,256       6.0 %
Madison Logic, Inc. (d)   Marketing Orchestration Software   First Lien Term Loan
(3M USD TERM SOFR+7.00%), 11.89% Cash, 12/30/2028
  12/10/2021   $ 19,000,000       18,626,777       18,715,000       5.4 %
        Total Marketing Orchestration Software                 18,626,777       18,715,000       5.4 %
ARC Health OpCo LLC (d)   Mental Healthcare Services   First Lien Term Loan
(3M USD TERM SOFR+8.48%), 13.37% Cash, 8/5/2027
  8/5/2022   $ 6,500,000       6,427,296       6,461,000       1.9 %
ARC Health OpCo LLC (d), (j)   Mental Healthcare Services   Delayed Draw Term Loan
(3M USD TERM SOFR+8.48%), 13.37% Cash, 8/5/2027
  8/5/2022   $ 7,726,978       7,634,711       7,680,616       2.2 %
ARC Health OpCo LLC (h)   Mental Healthcare Services   Class A Preferred Shares   8/5/2022     2,808,236       3,035,108       2,780,153       0.8 %
        Total Mental Healthcare Services                 17,097,115       16,921,769       4.9 %
Chronus LLC   Mentoring Software   First Lien Term Loan
(3M USD LIBOR+5.25), 10.22% Cash, 8/26/2026
  8/26/2021   $ 15,000,000       14,887,780       14,890,500       4.3 %
Chronus LLC   Mentoring Software   First Lien Term Loan
(3M USD LIBOR+6.00), 10.97% Cash, 8/26/2026
  8/26/2021   $ 3,000,000       2,973,634       2,978,100       0.9 %
Chronus LLC (h)   Mentoring Software   Series A Preferred Stock   8/26/2021     3,000       3,000,000       3,490,403       1.0 %
        Total Mentoring Software                 20,861,414       21,359,003       6.2 %

 

F-14

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Omatic Software, LLC  Non-profit Services  First Lien Term Loan
(3M USD TERM SOFR+8.00%), 14.15% Cash/1.00% PIK, 1/31/2024
  5/29/2018  $13,122,781    13,091,197    13,095,223    3.8%
      Total Non-profit Services           13,091,197    13,095,223    3.8%
Emily Street Enterprises, L.L.C.  Office Supplies  Senior Secured Note
(3M USD TERM SOFR+7.50%), 12.39% Cash, 12/31/2025
  12/28/2012  $6,000,000    5,974,379    5,965,800    1.7%
Emily Street Enterprises, L.L.C. (h)  Office Supplies  Warrant Membership Interests,
Expires 12/31/2025
  12/28/2012   49,318    400,000    406,755    0.1%
      Total Office Supplies           6,374,379    6,372,555    1.8%
Buildout, Inc.  Real Estate Services  First Lien Term Loan
(3M USD LIBOR+7.00%), 11.97% Cash, 7/9/2025
  7/9/2020  $14,000,000    13,924,435    13,855,800    4.0%
Buildout, Inc.  Real Estate Services  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 11.97% Cash, 7/9/2025
  2/12/2021  $38,500,000    38,257,589    38,103,450    11.0%
Buildout, Inc. (h), (i)  Real Estate Services  Limited Partner Interests  7/9/2020   1,250    1,372,557    1,447,219    0.4%
      Total Real Estate Services           53,554,581    53,406,469    15.4%
Archimedes Parent LLC (h)  Research Software  Class A Common Units  6/27/2022   1,125,160    1,125,160    1,136,503    0.3%
Wellspring Worldwide Inc.  Research Software  First Lien Term Loan
(1M USD BSBY+7.25%), 11.83% Cash, 6/27/2027
  6/27/2022  $9,600,000    9,503,123    9,540,480    2.7%
      Total Research Software           10,628,283    10,676,983    3.0%
LFR Chicken LLC  Restaurant  First Lien Term Loan
(1M USD LIBOR+7.00%), 11.67% Cash, 11/19/2026
  11/19/2021  $12,000,000    11,906,864    11,866,800    3.4%
LFR Chicken LLC (j)  Restaurant  Delayed Draw Term Loan
(1M USD LIBOR+7.00%), 11.67% Cash, 11/19/2026
  11/19/2021  $9,000,000    8,927,326    8,900,100    2.6%

 

F-15

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
LFR Chicken LLC (h)  Restaurant  Series B Preferred Units  11/19/2021   497,183    1,000,000    1,177,373    0.3%
TMAC Acquisition Co., LLC  Restaurant  Unsecured Term Loan
8.00% PIK, 3/1/2024
  3/1/2018  $3,217,657    3,217,657    2,881,888    0.8%
      Total Restaurant           25,051,847    24,826,161    7.1%
Pepper Palace, Inc. (d)  Specialty Food Retailer  First Lien Term Loan
(3M USD LIBOR+6.25%), 11.22% Cash, 6/30/2026
  6/30/2021  $33,490,000    33,255,863    24,410,861    7.0%
Pepper Palace, Inc. (j)  Specialty Food Retailer  Delayed Draw Term Loan
(3M USD LIBOR+6.25%), 11.22% Cash, 6/30/2026
  6/30/2021  $
-
    
-
    
-
    0.0%
Pepper Palace, Inc. (j)  Specialty Food Retailer  Revolving Credit Facility
(3M USD LIBOR+6.25%), 11.22% Cash, 6/30/2026
  6/30/2021  $
-
    
-
    
-
    0.0%
Pepper Palace, Inc. (h)  Specialty Food Retailer  Membership Interest  6/30/2021   1,000,000    1,000,000    
-
    0.0%
      Total Specialty Food Retailer           34,255,863    24,410,861    7.0%
ArbiterSports, LLC (d)  Sports Management  First Lien Term Loan
(3M USD LIBOR+6.50%), 11.47% Cash, 2/21/2025
  2/21/2020  $26,000,000    25,894,505    25,721,800    7.4%
ArbiterSports, LLC  Sports Management  Delayed Draw Term Loan
(3M USD LIBOR+6.50%), 11.47% Cash, 2/21/2025
  2/21/2020  $1,000,000    1,000,000    989,300    0.3%
      Total Sports Management           26,894,505    26,711,100    7.7%
Avionte Holdings, LLC (h)  Staffing Services  Class A Units  1/8/2014   100,000    100,000    2,079,325    0.6%
      Total Staffing Services           100,000    2,079,325    0.6%
JDXpert  Talent Acquisition Software  First Lien Term Loan
(3M USD LIBOR+8.50%), 13.47% Cash, 5/2/2027
  5/2/2022  $6,000,000    5,947,780    6,045,000    1.7%
JDXpert (j)  Talent Acquisition Software  Delayed Draw Term Loan
(3M USD LIBOR+8.50%), 13.47% Cash, 5/2/2027
  5/2/2022  $
-
    
-
    
-
    0.0%
Jobvite, Inc. (d)  Talent Acquisition Software  First Lien Term Loan
(3M USD TERM SOFR+8.00%), 12.89% Cash, 8/5/2028
  8/5/2022  $20,000,000    19,857,613    19,954,000    5.8%
      Total Talent Acquisition Software           25,805,393    25,999,000    7.5%
Sub Total Non-control/Non-affiliate investments                 819,966,208    828,028,800    238.6%

 

F-16

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Affiliate investments - 8.1% (b)                             
ETU Holdings, Inc. (f)  Corporate Education Software  First Lien Term Loan
(3M USD LIBOR+9.00%), 13.97% Cash, 8/18/2027
  8/18/2022  $7,000,000    6,935,556    7,006,300    2.0%
ETU Holdings, Inc. (f)  Corporate Education Software  Second Lien Term Loan
15.00% PIK, 2/18/2028
  8/18/2022  $5,282,563    5,235,433    5,175,327    1.5%
ETU Holdings, Inc. (f), (h)  Corporate Education Software  Series A-1 Preferred Stock  8/18/2022   3,000,000    3,000,000    3,072,504    0.9%
      Total Corporate Education Software           15,170,989    15,254,131    4.4%
Axero Holdings, LLC (f)  Employee Collaboration Software  First Lien Term Loan
(3M USD TERM SOFR+8.00%), 13.04% Cash, 6/30/2026
  6/30/2021  $5,500,000    5,460,448    5,513,200    1.6%
Axero Holdings, LLC (f)  Employee Collaboration Software  Delayed Draw Term Loan
(3M USD TERM SOFR+8.00%), 13.04% Cash, 6/30/2026
  6/30/2021  $1,100,000    1,090,883    1,102,640    0.3%
Axero Holdings, LLC (f), (j)  Employee Collaboration Software  Revolving Credit Facility
(3M USD TERM SOFR+8.00%), 13.04% Cash, 6/30/2026
  2/3/2022  $
-
    
-
    
-
    0.0%
Axero Holdings, LLC (f), (h)  Employee Collaboration Software  Series A Preferred Units  6/30/2021   2,000,000    2,000,000    2,498,000    0.7%
Axero Holdings, LLC (f), (h)  Employee Collaboration Software  Series B Preferred Units  6/30/2021   2,000,000    2,000,000    3,937,900    1.1%
      Total Employee Collaboration Software           10,551,331    13,051,740    3.7%
Sub Total Affiliate investments                 25,722,320    28,305,871    8.1%

 

F-17

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

Company(1)   Industry   Investment Interest Rate/
Maturity
  Original Acquisition Date   Principal/
Number of Shares
    Cost     Fair Value (c)     % of
Net Assets
 
Control investments - 33.6% (b)                                            
Netreo Holdings, LLC (g)   IT Services   First Lien Term Loan
(3M USD LIBOR +6.50%), 13.47% Cash/2.00% PIK
12/31/2025
  7/3/2018   $ 5,539,029       5,522,608       5,443,757       1.6 %
Netreo Holdings, LLC (d), (g)   IT Services   Delayed Draw Term Loan
(3M USD LIBOR +6.50%), 13.47% Cash/2.00% PIK,
12/31/2025
  5/26/2020   $ 22,111,008       22,019,877       21,730,699       6.3 %
Netreo Holdings, LLC (g), (h)   IT Services   Common Stock Class A Unit   7/3/2018     4,600,677       8,344,500       16,992,742       4.9 %
        Total IT Services                 35,886,985       44,167,198       12.8 %
Saratoga Investment Corp. CLO 2013-1, Ltd. (a), (e), (g)   Structured Finance Securities   Other/Structured Finance Securities
0.00%, 4/20/2033
  1/22/2008   $ 111,000,000       28,943,904       21,176,578       6.1 %
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-2-R-3 Note (a), (g)   Structured Finance Securities   Other/Structured Finance Securities
(3M USD LIBOR+10.00%), 14.97%, 4/20/2033
  8/9/2021   $ 9,375,000       9,375,000       8,831,406       2.5 %
Saratoga Investment Corp. Senior Loan Fund 2022-1 Ltd. Class E Note (a), (g)   Structured Finance Securities   Other/Structured Finance Securities
(3M USD TERM SOFR+8.55%), 13.44%, 10/20/2033
  10/28/2022   $ 12,250,000       11,392,500       11,354,495       3.3 %
        Total Structured Finance Securities                 49,711,404       41,362,479       11.9 %
Saratoga Senior Loan Fund I JV, LLC (a), (g), (j)   Investment Fund   Unsecured Loan
10.00%, 6/15/2023
  2/17/2022   $ 17,618,954       17,618,954       17,618,954       5.1 %
Saratoga Senior Loan Fund I JV, LLC (a), (g), (h)   Investment Fund   Membership Interest   2/17/2022     17,583,486       17,583,486       13,106,951       3.8 %
        Total Investment Fund                 35,202,440       30,725,905       8.9 %
Sub Total Control investments                         120,800,829       116,255,582       33.6 %
TOTAL INVESTMENTS - 280.2% (b)                       $ 966,489,357     $ 972,590,253       280.3 %

 

F-18

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

   Number of Shares   Cost   Fair Value   % of
Net Assets
 
Cash and cash equivalents and cash and cash equivalents, reserve accounts - 27.7% (b)                    
U.S. Bank Money Market (l)   96,076,273   $96,076,273   $96,076,273    27.7%
Total cash and cash equivalents and cash and cash equivalents, reserve accounts   96,076,273   $96,076,273   $96,076,273    27.7%

 

(1) Securities are exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and are restricted securities.
   
(a) Represents an investment that is not a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, as amended (the 1940 Act”). As of February 28, 2023, non-qualifying assets represent 8.6% of the Company’s portfolio at fair value. As a BDC, the Company generally has to invest at least 70% of its total assets in qualifying assets.
   
(b) Percentages are based on net assets of $346,958,042 as of February 28, 2023.
   
(c) Because there is no “readily available market quotations” (as defined in the 1940 Act) 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 the Company’s senior secured revolving credit facility (see Note 8 to the consolidated financial statements).
   
(e) This investment does not have a stated interest rate that is payable thereon. As a result, the 0.00% interest rate floor 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.

 

F-19

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2023

 

(f) As defined in the 1940 Act, this portfolio company is an “affiliate” as we own between 5.0% and 25.0% of the outstanding voting securities. Artemis Wax is no longer an affiliate as of February 28, 2023. Transactions during the year ended February 28, 2023 in which the issuer was an affiliate are as follows:

 

Company   Purchases     Sales     Total Interest from Investments     Management Fee Income     Net Realized Gain (Loss) from Investments     Net Change in Unrealized Appreciation (Depreciation)  
Artemis Wax Corp.   $ 27,440,000     $ 6,162,526     $ 3,418,378     $                 -     $             -     $ (1,460,287)  
Axero Holdings, LLC     1,089,000               -       848,422                 -                  -       1,951,499  
ETU Holdings, Inc.     14,880,000       -       923,437       -       -       83,142  
Total   $ 43,409,000     $ 6,162,526     $ 5,190,237     $ -     $ -     $ 574,354  

 

(g)As defined in the 1940 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 28, 2023 in which the issuer was both an affiliate and a portfolio company that we control are as follows:

 

Company   Purchases     Sales     Total Interest from Investments     Management Fee Income     Net Realized Gain (Loss) from Investments     Net Change in Unrealized Appreciation (Depreciation)  
Netreo Holdings, LLC   $ 8,290,000     $            -     $ 2,529,483     $ -     $                -     $ (2,363,302 )
Saratoga Investment Corp. CLO 2013-1, Ltd.     -       -       1,228,486       3,269,820       -       (4,149,106 )
Saratoga Investment Corp. Senior Loan Fund 2022-1, Ltd. Class E Note     11,392,500       -       552,330       -       -       (38,005 )
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-2-R-3 Note     -       -       1,195,662       -       -       (543,594 )
Saratoga Senior Loan Fund I JV, LLC     4,493,954       -       1,483,522       -       -       -  
Saratoga Senior Loan Fund I JV, LLC     4,458,486       -       -       -       -       (3,367,599 )
Total   $ 28,634,940     $ -     $ 6,989,483     $ 3,269,820     $ -     $ (10,461,606 )

 

(h) Non-income producing at February 28, 2023.
(i) Includes securities issued by an affiliate of the company.
(j) All or a portion of this investment has an unfunded commitment as of February 28, 2023. (See Note 9 to the consolidated financial statements).
(k) As of February 28, 2023, the investment was on non-accrual status. The fair value of these investments was approximately $9.8 million, which represented 2.8% 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 28, 2023.

 

BSBY - Bloomberg Short-Term Bank Yield

LIBOR - London Interbank Offered Rate

SOFR - Secured Overnight Financing Rate

 

1M USD BSBY - The 1 month USD BSBY rate as of February 28, 2023 was 4.58%.

3M USD BSBY - The 3 month USD BSBY rate as of February 28, 2023 was 4.87%.

1M USD LIBOR - The 1 month USD LIBOR rate as of February 28, 2023 was 4.67%.

3M USD LIBOR - The 3 month USD LIBOR rate as of February 28, 2023 was 4.97%.

1M USD TERM SOFR - The 1 month USD TERM SOFR rate as of February 28, 2023 was 4.66%

3M USD TERM SOFR - The 3 month USD TERM SOFR rate as of February 28, 2023 was 4.89%

PIK - Payment-in-Kind (see Note 2 to the consolidated financial statements).

 

See accompanying notes to consolidated financial statements.

 

F-20

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2022

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Non-control/Non-affiliate investments - 187.4% (b)                         
Targus Holdings, Inc. (h)  Consumer Products  Common Stock  12/31/2009   210,456   $1,589,630   $692,535    0.2%
      Total Consumer Products           1,589,630    692,535    0.2%
Schoox, Inc. (h), (i)  Corporate Education Software  Series 1 Membership Interest  12/8/2020   1,050    475,698    3,305,839    0.9%
      Total Corporate Education Software           475,698    3,305,839    0.9%
GreyHeller LLC (h)  Cyber Security  Common Stock  11/10/2021   6,742,392    1,635,704    1,635,704    0.5%
      Total Cyber Security           1,635,704    1,635,704    0.5%
New England Dental Partners  Dental Practice Management  First Lien Term Loan
(3M USD LIBOR+8.00%), 8.50% Cash, 11/25/2025
  11/25/2020  $6,555,000    6,502,672    6,404,891    1.8%
New England Dental Partners (j)  Dental Practice Management  Delayed Draw Term Loan (3M USD LIBOR+8.00%), 8.50% Cash, 11/25/2025  11/25/2020  $2,150,000    2,132,639    1,997,715    0.6%
      Total Dental Practice Management           8,635,311    8,402,606    2.4%
PDDS Buyer, LLC (d)  Dental Practice Management Software  First Lien Term Loan (3M USD LIBOR+5.50%), 6.00% Cash, 7/15/2024  7/15/2019  $28,000,000    27,943,852    27,938,400    7.9%
PDDS Buyer, LLC (h)  Dental Practice Management Software  Series A-1 Preferred Shares  8/10/2020   1,755,831    2,000,000    7,099,940    2.0%
      Total Dental Practice Management Software           29,943,852    35,038,340    9.9%
C2 Educational Systems  Education Services  First Lien Term Loan
(3M USD LIBOR+8.50%), 10.00% Cash, 5/31/2023
  5/31/2017  $18,500,000    18,484,747    18,220,650    5.1%
C2 Education Systems, Inc. (h)  Education Services  Series A-1 Preferred Stock  5/18/2021   3,127    499,904    599,296    0.2%
Zollege PBC  Education Services  First Lien Term Loan
(3M USD LIBOR+5.50%), 6.50% Cash, 5/11/2026
  5/11/2021  $16,000,000    15,877,908    15,794,300    4.4%
Zollege PBC (j)  Education Services  Delayed Draw Term Loan (3M USD LIBOR+5.50%), 6.50% Cash, 5/11/2026  5/11/2021  $500,000    495,811    493,950    0.1%
Zollege PBC (h)  Education Services  Class A Units  5/11/2021   250,000    250,000    201,218    0.1%
      Total Education Services           35,608,370    35,309,414    9.9%
Destiny Solutions Inc. (h), (i) 

Education

Software

  Limited Partner Interests  5/16/2018   3,065    3,969,291    7,632,061    2.1%
Identity Automation Systems (d)  Education Software  First Lien Term Loan (3M USD LIBOR+9.24%), 10.99% Cash, 5/8/2024  8/25/2014  $16,941,250    16,941,250    16,941,250    4.8%
Identity Automation Systems (h)  Education Software  Common Stock Class A-2 Units  8/25/2014   232,616    232,616    801,923    0.2%
Identity Automation Systems (h)  Education Software  Common Stock Class A-1 Units  3/6/2020   43,715    171,571    200,820    0.1%

 

F-21

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2022

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
GoReact  Education Software  First Lien Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/17/2020  $8,000,000    7,920,033    8,080,000    2.3%
GoReact (j)  Education Software  Delayed Draw Term Loan (3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025  1/18/2022  $-    -    -    0.0%
      Total Education Software           29,234,761    33,656,054    9.5%
TG Pressure Washing Holdings, LLC (h)  Facilities Maintenance  Preferred Equity  8/12/2019   488,148    488,148    482,036    0.1%
      Total Facilities Maintenance           488,148    482,036    0.1%
Davisware, LLC  Field Service Management  First Lien Term Loan (3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024  9/6/2019  $6,000,000    5,954,705    6,003,000    1.7%
Davisware, LLC (j)  Field Service Management  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019  $977,790    975,504    978,279    0.3%
      Total Field Service Management           6,930,209    6,981,279    2.0%
GDS Software Holdings, LLC  Financial Services  First Lien Term Loan
(3M USD LIBOR+7.00%), 8.00% Cash, 12/30/2026
  12/30/2021  $22,713,926    22,579,864    22,570,829    6.3%
GDS Software Holdings, LLC (j)  Financial Services  Delayed Draw Term loan (3M USD LIBOR+7.00%), 8.00% Cash, 12/30/2026  12/18/2021  $500,000    495,031    496,850    0.1%
GDS Software Holdings, LLC  (h)  Financial Services  Common Stock Class A Units  8/23/2018   250,000    250,000    472,009    0.1%
      Total Financial Services           23,324,895    23,539,688    6.5%
Ascend Software, LLC  Financial Services Software  First Lien Term Loan
(3M USD LIBOR+7.50%), 8.50% Cash, 12/15/2026
  12/15/2021  $6,000,000    5,942,482    5,940,000    1.7%
Ascend Software, LLC (j)  Financial Services Software  Delayed Draw Term Loan (3M USD LIBOR+7.50%), 8.50% Cash, 12/15/2026  12/15/2021  $-    -    -    0.0%
      Total Financial Services Software           5,942,482    5,940,000    1.7%
Ohio Medical, LLC (h)  Healthcare Products Manufacturing  Common Stock  1/15/2016   5,000    380,353    714,271    0.2%
      Total Healthcare Products Manufacturing           380,353    714,271    0.2%
Axiom Parent Holdings, LLC (h)  Healthcare Services  Common Stock Class A Units  6/19/2018   400,000    400,000    1,032,934    0.3%
Axiom Purchaser, Inc. (d)  Healthcare Services  First Lien Term Loan
(3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023
  6/19/2018  $10,000,000    9,974,217    10,013,000    2.8%
Axiom Purchaser, Inc. (d)  Healthcare Services  Delayed Draw Term Loan (3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023  6/19/2018  $6,000,000    5,977,846    6,007,800    1.7%

 

F-22

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2022

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
ComForCare Health Care (d)  Healthcare Services  First Lien Term Loan
(3M USD LIBOR+7.25%), 8.25% Cash, 1/31/2025
  1/31/2017  $25,000,000    24,903,581    25,000,000    7.0%
      Total Healthcare Services           41,255,644    42,053,734    11.8%
TRC HemaTerra, LLC (h)  Healthcare Software  Class D Membership Interests  4/15/2019   2,487    2,816,693    3,788,769    1.1%
HemaTerra Holding Company, LLC (d)  Healthcare Software  First Lien Term Loan (3M USD LIBOR+8.25%), 9.25% Cash, 1/31/2026  4/15/2019  $36,000,000    35,715,061    35,640,000    10.0%
HemaTerra Holding Company, LLC (d)  Healthcare Software  Delayed Draw Term Loan
(3M USD LIBOR+8.25%), 9.25% Cash, 1/31/2026
  4/15/2019  $14,000,000    13,912,744    13,860,000    3.9%
Procurement Partners, LLC  Healthcare Software  First Lien Term Loan (3M USD LIBOR+5.50%), 6.50% Cash, 11/12/2025  11/12/2020  $35,125,000    34,827,633    34,998,550    9.8%
Procurement Partners, LLC (j)  Healthcare Software  Delayed Draw Term Loan
(3M USD LIBOR+5.50%), 6.50% Cash, 11/12/2025
  11/12/2020  $1,200,000    1,188,047    1,195,680    0.3%
Procurement Partners Holdings LLC (h)  Healthcare Software  Class A Units  11/12/2020   550,986    550,986    643,044    0.2%
      Total Healthcare Software           89,011,164    90,126,043    25.3%
Roscoe Medical, Inc. (h) Healthcare Supply  Common Stock  3/26/2014   5,081    508,077    52,853    0.0%
Roscoe Medical, Inc.  Healthcare Supply  Second Lien Term Loan
11.25% Cash, 3/31/2022
  3/26/2014  $5,141,413    5,141,413    5,141,413    1.4%
     Total Healthcare Supply           5,649,490    5,194,266    1.4%

 

F-23

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2022

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Book4Time, Inc. (a), (d)  Hospitality/Hotel  First Lien Term Loan
(3M USD LIBOR+8.50%), 10.25%, 12/22/2025
  12/22/2020  $3,136,517    3,111,278    3,112,052    0.9%
Book4Time, Inc. (a), (j)  Hospitality/Hotel  Delayed Draw Term Loan (3M USD LIBOR+8.50%), 10.25%, 12/22/2025  12/22/2020  $-    -    -    0.0%
Book4Time, Inc. (a), (h), (i)  Hospitality/Hotel  Class A Preferred Shares  12/22/2020  $200,000    156,826    198,638    0.1%
Knowland Group, LLC  Hospitality/Hotel  Second Lien Term Loan (3M USD LIBOR+8.00%), 10.00% Cash/1.00% PIK, 5/9/2024  11/9/2018  $15,878,989    15,878,989    10,592,873    3.0%
Sceptre Hospitality Resources, LLC  Hospitality/Hotel  First Lien Term Loan
(1M USD LIBOR+8.00%), 9.00% Cash, 9/2/2026
  4/27/2020  $6,000,000    5,952,460    6,021,000    1.7%
Sceptre Hospitality Resources, LLC (j)  Hospitality/Hotel  Delayed Draw Term Loan (1M USD LIBOR+8.00%), 9.00% Cash, 9/2/2026  9/2/2021  $-    -    -    0.0%
      Total Hospitality/Hotel           25,099,553    19,924,563    5.7%
Granite Comfort, LP  HVAC Services and Sales  First Lien Term Loan (1M USD LIBOR+8.00%), 9.00% Cash, 11/16/2025  11/16/2020  $28,000,000    27,764,146    27,977,600    7.9%
Granite Comfort, LP(j)  HVAC Services and Sales  Delayed Draw Term Loan
(1M USD LIBOR+8.00%), 9.00% Cash, 11/16/2025
  11/16/2020  $2,000,000    1,980,805    1,998,400    0.6%
      Total HVAC Services and Sales           29,744,951    29,976,000    8.5%
AgencyBloc, LLC  Insurance Software  First Lien Term Loan
(3M USD BSBY+8.00%), 9.00% Cash, 10/1/2026
  10/1/2021  $9,000,000    8,925,938    8,920,800    2.5%
Panther ParentCo LLC (h)  Insurance Software  Class A Units  10/1/2021   2,000,000    2,000,000    2,000,000    0.6%
      Total Insurance Software           10,925,938    10,920,800    3.1%

 

F-24

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2022

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Vector Controls Holding Co., LLC (d)  Industrial Products  First Lien Term Loan (3M USD LIBOR+6.50%), 8.00% Cash, 3/6/2025  3/6/2013  $5,008,186    5,008,186    5,008,186    1.4%
Vector Controls Holding Co., LLC (h)  Industrial Products  Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027  5/31/2015   343    -    3,418,993    1.0%
      Total Industrial Products           5,008,186    8,427,179    2.4%
LogicMonitor, Inc. (d)  IT Services  First Lien Term Loan
(3M USD LIBOR+5.00), 6.00% Cash, 5/17/2023
  3/20/2020  $43,000,000    42,806,801    43,000,000    12.1%
      Total IT Services           42,806,801    43,000,000    12.1%
Centerbase, LLC  Legal Software  First Lien Term Loan
(Daialy USD SOFR+7.50%), 8.50% Cash, 1/18/2027
  1/18/2022  $7,500,000    7,409,860    7,425,000    2.1%
      Total Legal Software           7,409,860    7,425,000    2.1%
Madison Logic, Inc.  Marketing Orchestration Software  First Lien Term Loan
(1M USD LIBOR+5.75%), 6.75% Cash, 11/22/2026
  12/10/2021  $28,915,663    28,782,977    28,776,867    8.1%
Madison Logic, Inc. (j)  Marketing Orchestration Software  Revolving Credit Facility (1M USD LIBOR+5.75%), 6.75% Cash, 11/22/2026  12/10/2021  $-    -    -    0.0%
      Total Marketing Orchestration Software           28,782,977    28,776,867    8.1%
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    12,139,533    12,290,280    3.5%
inMotionNow, Inc. (d)  Marketing Services  Delayed Draw Term Loan (3M USD LIBOR+7.50)10.00% Cash, 5/15/2024  5/15/2019  $5,000,000    4,972,992    5,037,000    1.4%
      Total Marketing Services           17,112,525    17,327,280    4.9%
Chronus LLC  Mentoring Software  First Lien Term Loan
(3M USD LIBOR+5.25), 6.25% Cash, 8/26/2026
  8/26/2021  $15,000,000    14,861,338    14,938,500    4.2%
Chronus LLC (h)  Mentoring Software  Series A Preferred Stock  8/26/2021   3,000    3,000,000    3,382,625    1.0%
      Total Mentoring Software           17,861,338    18,321,125    5.2%
Omatic Software, LLC  Non-profit Services  First Lien Term Loan (3M USD LIBOR+8.00%), 9.75% Cash/1.00% PIK, 5/29/2023  5/29/2018  $10,010,685    9,955,082    10,038,714    2.8%
      Total Non-profit Services           9,955,082    10,038,714    2.8%

 

F-25

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2022

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Emily Street Enterprises, L.L.C.  Office Supplies  Senior Secured Note (3M USD LIBOR+8.50%), 10.00% Cash, 12/31/2023  12/28/2012  $3,300,000    3,300,000    3,278,880    0.9%
Emily Street Enterprises, L.L.C. (h)  Office Supplies  Warrant Membership Interests Expires 12/28/2022  12/28/2012   49,318    400,000    446,927    0.1%
      Total Office Supplies           3,700,000    3,725,807    1.0%
Apex Holdings Software Technologies, LLC  Payroll Services  First Lien Term Loan
(3M USD LIBOR+8.00%), 9.00% Cash, 9/21/2024
  9/21/2016  $17,000,000    16,990,006    17,000,000    4.7%
      Total Payroll Services           16,990,006    17,000,000    4.7%
Buildout, Inc.  Real Estate Services  First Lien Term Loan
(3M USD LIBOR+7.00%), 8.00% Cash, 7/9/2025
  7/9/2020  $14,000,000    13,897,546    13,904,800    3.9%
Buildout, Inc.  Real Estate Services  Delayed Draw Term Loan (3M USD LIBOR+7.00%), 8.00% Cash, 7/9/2025  2/12/2021  $38,500,000    38,173,998    38,238,200    10.6%
Buildout, Inc. (h), (i)  Real Estate Services  Limited Partner Interests  7/9/2020   1,205    1,205,308    1,363,014    0.4%
      Total Real Estate Services           53,276,852    53,506,014    14.9%
LFR Chicken LLC  Restaurant  First Lien Term Loan
(1M USD LIBOR+7.00%), 8.00% Cash, 11/19/2026
  11/19/2021  $12,000,000    11,886,588    11,880,000    3.3%
LFR Chicken LLC (j)  Restaurant  Delayed Draw Term Loan (1M USD LIBOR+7.00%), 8.00% Cash, 11/19/2026  11/19/2021  $-    -    -    0.0%
LFR Chicken LLC (h)  Restaurant  Series B Preferred Units  11/19/2021   497,183    1,000,000    999,984    0.3%
TMAC Acquisition Co., LLC  Restaurant  Unsecured Term Loan 8.00% PIK, 9/01/2023  3/1/2018  $2,979,312    2,979,312    2,805,541    0.8%
      Total Restaurant           15,865,900    15,685,525    4.4%

 

F-26

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2022

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Pepper Palace, Inc. (d)  Specialty Food Retailer  First Lien Term Loan (3M USD LIBOR+6.25%), 7.25% Cash, 6/30/2026  6/30/2021  $33,830,000    33,531,592    33,261,656    9.2%
Pepper Palace, Inc. (j)  Specialty Food Retailer  Delayed Draw Term Loan
(3M USD LIBOR+6.25%), 7.25% Cash, 6/30/2026
  6/30/2021  $-    -    (33,600)   0.0%
Pepper Palace, Inc. (j)  Specialty Food Retailer  Revolving Credit Facility (3M USD LIBOR+6.25%), 7.25% Cash, 6/30/2026  6/30/2021  $-    -    (42,000)   0.0%
Pepper Palace, Inc. (h)  Specialty Food Retailer  Membership Interest  6/30/2021   1,000,000    1,000,000    827,050    0.1%
      Total Specialty Food Retailer           34,531,592    34,013,106    9.3%
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    25,846,091    25,667,199    7.1%
ArbiterSports, LLC (d)  Sports Management  Delayed Draw Term Loan (3M USD LIBOR+6.50%), 8.25% Cash, 2/21/2025  2/21/2020  $1,000,000    999,997    987,200    0.3%
      Total Sports Management           26,846,088    26,654,399    7.4%
Avionte Holdings, LLC (h)  Staffing Services  Class A Units  1/8/2014   100,000    100,000    1,912,328    0.5%
      Total Staffing Services           100,000    1,912,328    0.5%
Jobvite, Inc. (d)  Talent Acquisition Software  Second Lien Term Loan (3M USD LIBOR+7.50%), 8.50% Cash, 1/6/2027  7/6/2021  $20,000,000    19,841,684    19,652,000    5.5%
      Total Talent Acquisition Software           19,841,684    19,652,000    5.5%
National Waste Partners (d)  Waste Services  Second Lien Term Loan 10.00% Cash, 11/13/2022  2/13/2017  $9,000,000    9,000,000.0    9,000,000.0    2.5%
      Total Waste Services           9,000,000    9,000,000    2.5%
Sub Total Non-control/Non-affiliate investments                 654,965,044    668,358,516    187.4%

 

F-27

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2022

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition
Date
  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Affiliate investments - 13.5% (b)                             
Artemis Wax Corp. (f), (j)  Consumer Services  Delayed Draw Term Loan (1M USD LIBOR+9.00%), 11.00% Cash, 5/20/2026  5/20/2021  $30,000,000    29,727,282    30,000,000    8.4%
Artemis Wax Corp. (f), (h)  Consumer Services  Series B-1 Preferred Stock  5/20/2021   934,463    1,500,000    2,687,573    0.8%
Artemis Wax Corp. (f), (h)  Consumer Services  Series C Preferred Stock  5/20/2021   5,547    5,546,609    5,546,605    1.6%
      Total Consumer Services           36,773,891    38,234,178    10.8%
Axero Holdings, LLC (f)  Employee Collaboration Software  First Lien Term Loan (3M USD LIBOR+10.00%), 11.00% Cash, 6/30/2026  6/30/2021  $5,500,000    5,451,036    5,482,950    1.5%
Axero Holdings, LLC (f), (j)  Employee Collaboration Software  Delayed Draw Term Loan
(3M USD LIBOR+10.00%), 11.00% Cash, 6/30/2026
  6/30/2021  $-    -    -    0.0%
Axero Holdigns, LLC (f), (j)  Employee Collaboration Software  Revolving Credit Facility (3M USD LIBOR+10.00%), 11.00% Cash, 6/30/2026  2/3/2022  $-    -    -    0.0%
Axero Holdings, LLC (f), (h)  Employee Collaboration Software  Series A Preferred Units  6/30/2021   2,000,000    2,000,000    2,198,000    0.5%
Axero Holdings, LLC (f), (h)  Employee Collaboration Software  Series B Preferred Units  6/30/2021   2,000,000    2,000,000    2,318,996    0.7%
      Total Employee Collaboration Software           9,451,036    9,999,946    2.7%
Sub Total Affiliate investments                 46,224,927    48,234,124    13.5%

 

F-28

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2022

 

Company(1)  Industry  Investment Interest Rate/
Maturity
  Original Acquisition
Date
  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Control investments - 28.3% (b)                             
Netreo Holdings, LLC (g)  IT Services  First Lien Term Loan (3M USD LIBOR +8.00%), 9.00% Cash 12/31/2025  7/3/2018  $5,432,440    5,409,201    5,421,575    1.4%
Netreo Holdings, LLC (d), (g), (j)  IT Services  Delayed Draw Term Loan
(3M USD LIBOR +8.00%), 9.00% Cash,
12/31/2025
  5/26/2020  $13,433,515    13,406,530    13,406,648    3.8%
Netreo Holdings, LLC (g), (h)  IT Services  Common Stock Class A Unit  7/3/2018   4,600,677    8,344,500    18,975,523    5.3%
      Total IT Services           27,160,231    37,803,746    10.5%
Saratoga Investment Corp. CLO 2013-1, Ltd. (a), (e), (g)  Structured Finance Securities  Other/Structured Finance Securities 9.27%, 4/20/2033  1/22/2008  $111,000,000    32,273,125    28,654,905    8.1%
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-2-R-3 Note (a), (g)  Structured Finance Securities  Other/Structured Finance Securities
(3M USD LIBOR+10.00%), 10.17%, 4/20/2033
  8/9/2021  $9,375,000    9,375,000    9,375,000    2.6%
      Total Structured Finance Securities           41,648,125    38,029,905    10.7%
Saratoga Senior Loan Fund I JV, LLC (a), (g), (j)  Investment Fund  Unsecured Loan
10.00%, 6/15/2023
  2/17/2022  $13,125,000    13,125,000    13,125,000    3.7%
Saratoga Senior Loan Fund I JV, LLC (a), (g), (j)  Investment Fund  Membership Interest  2/17/2022   13,125,000    13,125,000    12,016,064    3.4%
      Total Investment Fund           26,250,000    25,141,064    7.1%
Sub Total Control investments                 95,058,356    100,974,715    28.3%
TOTAL INVESTMENTS - 229.2% (b)                $796,248,327   $817,567,355    229.2%

 

   Number of Shares   Cost   Fair Value   %  of
Net Assets
 
Cash and cash equivalents and cash and cash equivalents, reserve accounts - 14.9% (b)                
U.S. Bank Money Market (k)   52,870,342   $52,870,342   $52,870,342    14.9%
Total cash and cash equivalents and cash and cash equivalents, reserve accounts   52,870,342   $52,870,342   $52,870,342    14.9%

 

(1)Securities are exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and are restricted securities.

 

(a)Represents an investment that is not a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, as amended (the 1940 Act”). As of February 28, 2022, non-qualifying assets represent 6.7% of the Company’s portfolio at fair value. As a BDC, the Company generally has to invest at least 70% of its total assets in qualifying assets.

 

(b)Percentages are based on net assets of $355,780,523 as of February 28, 2022.

 

F-29

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2022

 

(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 8 to the consolidated financial statements).

 

(e)This investment does not have a stated interest rate that is payable thereon. As a result, the 9.27% 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.

 

(f)As defined in the 1940 Act, this portfolio company is an “affiliate” as we own between 5.0% and 25.0% of the outstanding voting securities. GreyHeller, LLC is no longer an affiliate as of February 28, 2022. Transactions during the year ended February 28, 2022 in which the issuer was an affiliate are as follows:

 

Company  Purchases   Sales   Total Interest from Investments   Management Fee Income   Net Realized
Gain (Loss) from Investments
   Net Change in Unrealized Appreciation (Depreciation) 
Artemis Wax Corp.  $36,200,000   $
-
   $1,919,100   $
         -
   $
-
   $1,460,287 
Axero Holdings, LLC   9,445,000    
-
    416,092    
-
    
-
    548,910 
GreyHeller, LLC   8,910,000    (26,428,457)   973,278    
-
    7,328,457    (3,102,569)
Top Gun   
-
    
-
    
-
    
-
    
-
    1,066,536 
Total  $54,555,000   $(26,428,457)  $3,308,471   $
-
   $7,328,457   $(26,836)

 

(g)As defined in the 1940 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 28, 2022 in which the issuer was both an affiliate and a portfolio company that we control are as follows:

 

F-30

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2022

 

Company  Purchases   Sales   Total Interest from Investments   Management Fee Income   Net Realized
Gain (Loss) from Investments
   Net Change in Unrealized Appreciation (Depreciation) 
Netreo Holdings, LLC  $17,074,500   $
-
   $1,814,735   $
-
   $
-
   $5,055,909 
Saratoga Investment Corp. CLO 2013-1, Ltd.   
-
    
-
    4,372,958    3,262,591    
-
    (1,221,309)
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-R-3 Note   
-
    (17,875,000)   814,431    
-
    
-
    (454,025)
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-1-R-3 Note   8,500,000    (8,500,000)   4,786    
-
    (139,867)   
-
 
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-2-R-3 Note   9,375,000    
-
    539,564    
-
    
-
    
-
 
Saratoga Senior Loan Fund I JV, LLC   13,125,000    
-
    126,389    
-
    
-
    
-
 
Saratoga Senior Loan Fund I JV, LLC   13,125,000    
-
    
-
    
-
    
-
    (1,108,936)
Total  $61,199,500   $(26,375,000)  $7,672,863   $3,262,591   $(139,867)  $2,271,639 

 

(h)Non-income producing at February 28, 2022.

(i)Includes securities issued by an affiliate of the company.

(j)All or a portion of this investment has an unfunded commitment as of February 28, 2022. (See Note 9 to the consolidated financial statements).

(k)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 28, 2022.

 

BSBY - Bloomberg Short-Term Bank Yield

LIBOR - London Interbank Offered Rate

SOFR - Secured Overnight Financing Rate

 

3M USD BSBY - The 3 month USD BSBY rate as of February 28, 2022 was 0.50%.

1M USD LIBOR - The 1 month USD LIBOR rate as of February 28, 2022 was 0.24%.

3M USD LIBOR - The 3 month USD LIBOR rate as of February 28, 2022 was 0.50%.

Daily USD SOFR - The daily USD SOFR rate as of February 28, 2022 was 0.05%

PIK - Payment-in-Kind (see Note 2 to the consolidated financial statements).

 

See accompanying notes to consolidated financial statements.

 

F-31

 

 

SARATOGA INVESTMENT CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

February 28, 2023

 

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 the initial public offering (“IPO”) on March 28, 2007. The Company has elected, and intends to qualify annually, to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). 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-ARC, Inc., SIA-Avionte, Inc., SIA-AX, Inc., SIA-G4, Inc., SIA-GH, Inc., SIA-MAC, Inc., SIA-PP Inc., SIA-TG, Inc., SIA-TT, Inc., SIA-Vector, Inc. and SIA-VR, Inc., which are structured as Delaware entities that are treated as corporations for U.S. federal income tax purposes and are intended to facilitate our compliance with the requirements to be treated as a RIC under the Code by holding equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass through entities). These entities 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. In February 2022, SIA-GH, Inc., SIA-TT Inc. and SIA-VR, Inc. received an approved plan of liquidation following the sale of equity held by each of the portfolio companies.

 

Our wholly owned subsidiaries, Saratoga Investment Corp. SBIC LP (“SBIC LP”), Saratoga Investment Corp. SBIC II LP (“SBIC II LP”), and Saratoga Investment Corp. SBIC III LP (“SBIC III LP”, and together with SBIC LP and SBIC II LP, the “SBIC Subsidiaries”), received an SBIC license from the SBA on March 28, 2012, August 14, 2019, and September 29, 2022, respectively. SBIC LP’s license provided up to $150.0 million in additional long-term capital in the form of SBA debentures, while SBIC II LP’s and SBIC III LP’s SBIC licenses provide up to $175.0 million each. Under current SBIC regulations, for two or more SBICs under common control, the maximum amount of outstanding SBA debentures cannot exceed $350.0 million with at least $175.0 million in combined regulatory capital.

 

F-32

 

 

The Company has formed a wholly owned special purpose entity, Saratoga Investment Funding II LLC, a Delaware limited liability company (“SIF II”), for the purpose of entering into a $50.0 million senior secured revolving credit facility with Encina Lender Finance, LLC (the “Lender”), supported by loans held by SIF II and pledged to the Lender under the credit facility (the “Encina Credit Facility”). The Encina Credit Facility closed on October 4, 2021. During the first two years following the closing date, SIF II may request an increase in the commitment amount under the Encina Credit Facility to up to $75.0 million. The terms of the Encina Credit Facility require a minimum drawn amount of $12.5 million at all times during the first six months following the closing date, which increases to the greater of $25.0 million or 50% of the commitment amount in effect at any time thereafter. The term of the Encina Credit Facility is three years. Advances under the Encina Credit Facility bear interest at a floating rate per annum equal to LIBOR plus 4.0%, with LIBOR having a floor of 0.75%, with customary provisions related to the selection by the Lender and the Company of a replacement benchmark rate. Concurrently with the closing of the Encina Credit Facility, all remaining amounts outstanding on the Company’s existing revolving credit facility with Madison Capital Funding, LLC were repaid and the revolving credit facility terminated. On January 27, 2023, among other things, the borrowings available under the Encina Credit Facility was increased from up to $50.0 million to up to $65.0 million, the underlying benchmark rate used to compute interest changed from LIBOR to Term SOFR for one-month tenor plus a 0.10% credit spread adjustment; the applicable effective margin rate on borrowings increased from 4.00% to 4.25% and the maturity date was extended from October 4, 2024 to January 27, 2026.

 

On October 26, 2021, the Company and TJHA JV I LLC (“TJHA”) entered into a Limited Liability Company Agreement to co-manage Saratoga Senior Loan Fund I JV LLC (“SLF JV”). SLF JV is under joint control and is not consolidated. SLF JV is invested in Saratoga Investment Corp Senior Loan Fund 2022-1 Ltd. (“SLF 2022”), which is a wholly owned subsidiary of SLF JV. SLF 2022 was formed for the purpose of making investments in a diversified portfolio of broadly syndicated first lien and second lien term loans or bonds in the primary and secondary markets. On October 28, 2022, SLF 2022 issued $402.1 million of debt (the “2022 JV CLO Notes”) through a collateralized loan obligation trust (the “JV CLO trust”). The 2022 JV CLO Notes were issued pursuant to an indenture, dated October 28, 2022 (the “JV Indenture”), with U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association) (the “Trustee”) servicing as the trustee.

 

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 wholly owned special purpose financing subsidiaries, Saratoga Investment Funding, LLC (previously known as GSC Investment Funding LLC), SIF II, SBIC LP, SBIC II LP, SBIC III LP, SIA-ARC, Inc., SIA-Avionte, Inc., SIA-AX, Inc., SIA-G4, Inc., SIA-GH, Inc., SIA-MAC, Inc., SIA-PP, 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, SBIC II LP, and SBIC III 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, SBIC II LP, or SBIC III LP’s status as investment companies during the year ended February 28, 2023.

 

Principles of Consolidation

 

Under the investment company rules and regulations pursuant to ASC 946, the Company is precluded from consolidating any entity other than another investment company or controlled operating company whose business consists of providing services to the Company.  As a result, the consolidated financial statements of the Company include only the accounts of the Company and its wholly owned subsidiaries, including the Funds. All intercompany balances and transactions have been eliminated.

 

The Company has determined that SLF JV is an investment company under ASC 946; however, in accordance with such guidance the Company will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary. SLF JV is not a wholly owned investment company subsidiary as the Company and TJHA each have an equal 50% voting interest in SLF JV and thus neither party has a controlling financial interest. Furthermore, ASC 810 concludes that in a joint venture where both members have equal decision making authority, it is not appropriate for one member to consolidate the joint venture since neither has control. Accordingly, the Company does not consolidate its investment in SLF JV.

 

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.

 

F-33

 

 

Cash and Cash Equivalents

 

Cash and cash equivalents include short-term, liquid investments in a money market fund. The Company places its cash in financial institutions and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limits. Cash and cash equivalents are carried at cost which approximates fair value. Pursuant to Section 12(d)(1)(A) of the 1940 Act, the Company may not invest in another 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 investment company’s total outstanding voting;

 

  we were to hold securities in the investment company having an aggregate value in excess of 5.0% of the value of our total assets; or

 

  we were to hold securities in investment companies having an aggregate value in excess of 10.0% of the value of our total assets.

 

As of February 28, 2023, 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, and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limits, representing payments received on secured investments or other reserved amounts associated with the Encina Credit Facility within SIF II, our wholly owned subsidiary. 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 Encina 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, SBIC II LP and SBIC III 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.

 

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:

 

   February 28,
2023
   February 28,
2022
   February 28,
2021
 
Cash and cash equivalents  $65,746,494   $47,257,801   $18,828,047 
Cash and cash equivalents, reserve accounts   30,329,779    5,612,541    11,087,027 
Total cash and cash equivalents and cash and cash equivalents, reserve accounts  $96,076,273   $52,870,342   $29,915,074 

 

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 Measurements and Disclosure (“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 measurement 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.

 

F-34

 

 

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.

 

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. We use a third-party independent valuation firm to value our investment in the subordinated notes of Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”), the Class F-2-R-3 Notes tranche of the Saratoga CLO, and the Class E Notes tranche of the SLF 2022 every quarter.

 

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.

 

We use multiple techniques for determining fair value based on the nature of the investment and experience with those types of investments and specific portfolio companies. The selections of the valuation techniques and the inputs and assumptions used within those techniques often require subjective judgements and estimates. These techniques include market comparables, discounted cash flows and enterprise value waterfalls. Fair value is best expressed as a range of values from which the Company determines a single best estimate. The types of inputs and assumptions that may be considered in determining the range of values of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis and volatility in future interest rates, call and put features, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flows and other relevant factors.

 

The Company’s investments in Saratoga CLO Class F-2-R-3 Notes of the Saratoga CLO and the Class E Notes tranche of SLF 2022 is carried at fair value, which is based on a discounted cash flow valuation technique that utilizes prepayment, re-investment and loss inputs 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 flows, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The cash flows use a set of inputs including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated valuations. The inputs 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.

 

The Company’s equity investment in SLF JV is measured using the proportionate share of the net asset value (“NAV”), or equivalent, of SLF JV as a practical expedient for fair value, provided by ASC 820.

 

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 NAV 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.

 

F-35

 

 

In December 2020, the U.S. Securities and Exchange Commission (the “SEC”) adopted new Rule 2a-5 under the 1940 Act (“Rule 2a-5”) that establishes a regulatory framework for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits boards of directors, subject to board oversight and certain other conditions, to designate the investment adviser to perform fair value determinations. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must determine the fair value of a security. The SEC also adopted new Rule 31a-4 under the 1940 Act (“Rule 31a-4”) that provides the recordkeeping requirements associated with fair value determinations. Finally, the SEC rescinded previously issued guidance on related issues, including the role of the board in determining fair value and the accounting and auditing of fund investments. Rule 2a-5 and Rule 31a-4 became effective on March 8, 2021 and had a compliance date of September 8, 2022. While our board of directors has not elected to designate Saratoga Investment Advisors as the valuation designee, the Company has adopted certain revisions to its valuation policies and procedures in order comply with the applicable requirements of Rule 2a-5 and Rule 31a-4.

 

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 this general rule if the loan has sufficient collateral value and is in the process of collection. At February 28, 2023 our investment in one portfolio company was on non-accrual status with a fair value of approximately $9.8 million, or 1.0% of the fair value of our portfolio. At February 28, 2022, there were no investments on non-accrual status.

 

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.

 

Dividend Income

 

Dividend income is recorded in the consolidated statements of operations when earned.

 

F-36

 

 

Structuring and Advisory Fee Income

 

Structuring and advisory fee income represents various fee income earned and received for performing certain investment structuring and advisory activities during the closing of new investments.

 

Other Income

 

Other income includes prepayment income fees, and monitoring, administration, redemption and amendment 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 the SBA debentures of SBIC LP, SBIC II LP, and SBIC III LP are deferred and amortized using the straight-line method over the life of the debentures. Any discount or premium on the issuance of any debt is accreted and amortized using the effective interest method over the life of the respective debt security.

 

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.

  

Realized Loss on Extinguishment of Debt 

 

Upon the repayment of debt obligations that are deemed to be extinguishments, the difference between the principal amount due at maturity adjusted for any unamortized debt issuance costs is recognized as a loss (i.e., the unamortized debt issuance costs are recognized as a loss upon extinguishment of the underlying debt obligation).

 

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 reasonably believes 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.

 

Income Taxes

 

The Company has elected, and intends to qualify annually, to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. By meeting these requirements, the Company will not be subject to U.S. federal income tax on ordinary income or capital gains timely distributed to stockholders. Therefore, no provision has been recorded for federal income taxes, except as related to the Taxable Blockers and long-term capital gains, when applicable.

 

In order to qualify as a RIC, among other requirements, the Company generally is required to timely distribute to its stockholders at least 90% of its “investment company taxable income”, as defined by the Code, for each fiscal tax year. The Company will be subject to U.S. federal income tax at corporate rates on its investment company taxable income and net capital gains that it does not timely distribute to shareholders. The Company will be subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least (1) 98% of its net ordinary income in any calendar year, (2) 98.2% of its capital gain net income for each one-year period ending on October 31and (3) any net ordinary income and capital gain net income that it recognized for preceding years, but were not distributed during such year, and on which the Company paid no U.S federal income tax.

 

Depending on the level of investment company taxable income earned in a tax year and the amount of net capital gains recognized in such tax year, the Company may choose to carry forward investment company taxable income and net capital gains in excess of current year dividend distributions into the next tax year and pay U.S. federal income tax, and possibly the 4.0% U.S. federal excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual investment company taxable income will be in excess of estimated current year dividend distributions for U.S. federal excise tax purposes, the Company accrues the U.S. federal excise tax, if any, on estimated excess taxable income as taxable income is earned. For the years ended February 28, 2023, 2022 and 2021, the excise tax accrual on estimated excess table income was $1.1 million, $0.6 million and $0.7 million, respectively.

 

F-37

 

 

In accordance with U.S. Treasury regulations and published guidance issued by the Internal Revenue Service (“IRS”), a publicly offered RIC may treat a distribution of its own stock as counting toward its RIC distribution requirements if each stockholder may elect to receive his, her, or its entire distribution in either cash or stock of the RIC. This published guidance indicates that the rule will apply where the aggregate amount of cash to be distributed to all stockholders is not at least 20.0% of the aggregate declared distribution. Under the published guidance, if too many stockholders elect to receive cash, the cash available for distribution must be allocated among the stockholders electing to receive 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 28, 2023, February 28, 2022 and February 28, 2021 the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. The 2020, 2021, 2022 and 2023 federal tax years for the Company remain subject to examination by the IRS. At February 28, 2023, and February 28, 2022, 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.

 

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 some or all of our net 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 by the Company to the Manager on the consolidated statements of assets and liabilities when the net realized and unrealized gain on its investments exceed all net realized and unrealized capital losses on its investments because 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 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.

 

F-38

 

 

Recent Accounting Pronouncements

 

In June 2022, the FASB issued ASU No. 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (Topic 820),” which clarifies that a contractual sale restriction prohibiting the sale of an equity security is a characteristic of the reporting entity holding the equity security and is not included in the equity security’s unit of account. Accordingly, an entity should not consider the contractual sale restriction when measuring the equity security’s fair value. In addition, ASU No. 2022-03 prohibits an entity from recognizing a contractual sale restriction as a separate unit of account. ASU No. 2022-03’s amendments are effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU No. 2022-03 on its consolidated financial statements.

 

In March 2020, the FASB issued “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”) to provide optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 established Topic 848 to provide relief during the temporary transition period and includes a sunset provision based on expectations of when the London Interbank Offered Rate (“LIBOR”) would cease being published. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which deferred the sunset day of this guidance to December 31, 2024. With the adoption of ASU 2022-06, there was no significant impact to the Company’s financial position.

 

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.

 

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. 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 independent 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 that 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.

 

F-39

 

 

  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. 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 technique. We use multiple techniques for determining fair value based on the nature of the investment and experience with those types of investments and specific portfolio companies. The selections of the valuation techniques and the inputs and assumptions used within those techniques often require subjective judgements and estimates. These techniques include market comparables, discounted cash flows and enterprise value waterfalls. Fair value is best expressed as a range of values from which the Company determines a single best estimate. The types of inputs and assumptions that may be considered in determining the range of values of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis and volatility in future interest rates, call and put features, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flows and other relevant factors.

 

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.

 

The following table presents fair value measurements of investments, by major class, as of February 28, 2023 (dollars in thousands), according to the fair value hierarchy:

 

   Fair Value Measurements   Valued Using
Net Asset
     
   Level 1   Level 2   Level 3   Value*   Total 
First lien term loans  $
-
   $
-
   $798,534   $-   $798,534 
Second lien term loans   
-
    
-
    14,936    
-
    14,936 
Unsecured loans   
-
    
-
    20,661    
-
    20,661 
Structured finance securities   
-
    
-
    41,362    
-
    41,362 
Equity interests   
-
    
-
    83,990    13,107    97,097 
Total  $   -   $
             -
   $959,483   $13,107   $972,590 

 

*The Company’s equity investment in SLF JV is measured using the proportionate share of the NAV, or equivalent, as a practical expedient and thus has not been classified in the fair value hierarchy.

 

The following table presents fair value measurements of investments, by major class, as of February 28, 2022 (dollars in thousands), according to the fair value hierarchy:

 

   Fair Value Measurements   Valued Using
Net Asset
     
   Level 1   Level 2   Level 3   Value*   Total 
First lien term loans  $
-
   $
-
   $631,572   $
-
   $631,572 
Second lien term loans   
-
    
-
    44,386    
-
    44,386 
Unsecured loans   
-
    
-
    15,931    
-
    15,931 
Structured finance securities   
-
    
-
    38,030    
-
    38,030 
Equity interests   
-
    
-
    75,632    12,016    87,648 
Total  $
    -
   $
   -
   $805,551   $12,016   $817,567 

 

*The Company’s equity investment in SLF JV is measured using the proportionate share of the NAV, or equivalent, as a practical expedient and thus has not been classified in the fair value hierarchy.

 

F-40

 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 28, 2023 (dollars in thousands):

 

   First lien
term loans
   Second lien
term loans
   Unsecured
term loans
   Structured
finance
securities
   Equity
interests
   Total 
Balance as of February 28, 2022  $631,572   $44,386   $15,931   $38,030   $75,632   $805,551 
Payment-in-kind and other adjustments to cost   391    283    238    (3,329)   535    (1,882)
Net accretion of discount on investments   1,831    (14)   -    
-
    
-
    1,817 
Net change in unrealized appreciation (depreciation) on investments   (10,465)   (703)   (167)   (4,731)   4,215    (11,851)
Purchases   345,955    4,950    4,659    11,392    13,660    380,616 
Sales and repayments   (170,913)   (33,966)   
-
    -    (17,336)   (222,215)
Net realized gain (loss) from investments   163    
-
    
-
    
-
    7,284    7,447 
Balance as of February 28, 2023  $798,534   $14,936   $20,661   $41,362   $83,990   $959,483 
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 year  $(10,575)  $(892)  $(167)  $(4,731)  $6,111   $(10,254)

 

Purchases, PIK 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 year.

 

Transfers and restructurings, if any, are recognized at the beginning of the period in which they occur. There were no transfers or restructurings in or out of Levels 1, 2, or 3 during the year ended February 28, 2023.

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 28, 2022 (dollars in thousands):

 

   First lien
term loans
   Second lien
term loans
   Unsecured
term loans
   Structured
finance
securities
   Equity
interests
   Total 
Balance as of February 28, 2021  $440,456   $24,930   $2,141   $49,779   $37,007   $554,313 
Payment-in-kind and other adjustments to cost   (546)   111    718    (1,574)   943    (348)
Net accretion of discount on investments   2,008    35    
-
    
-
    
-
    2,043 
Net change in unrealized appreciation (depreciation) on investments   1,670    (515)   (54)   (1,676)   18,703    18,128 
Purchases   364,216    19,825    13,126    
-
    47,783    444,950 
Sales and repayments   (176,264)   
-
    
-
    (8,359)   (42,309)   (226,932)
Net realized gain (loss) from investments   32    
-
    
-
    (140)   13,505    13,397 
Balance as of February 28, 2022  $631,572   $44,386   $15,931   $38,030   $75,632   $805,551 
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 year  $2,605   $(515)  $(54)  $(1,222)  $21,361   $22,175 

 

F-41

 

 

Transfers and restructurings, if any, are recognized at the beginning of the period in which they occur. There were no transfers or restructurings in or out of Levels 1, 2, or 3 during the year ended February 28, 2022

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 28, 2023 were as follows (dollars in thousands):

 

   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted
Average*
 
First lien term loans  $798,534  Market Comparables  Market Yield (%)  10.5% - 23.1%  12.8% 
          Revenue Multiples (x)  4.1x  4.1x 
          EBITDA Multiples (x)  8.0x  8.0x 
Second lien term loans   14,936  Market Comparables  Market Yield (%)  15.6% - 61.8%  45.8% 
Unsecured term loans   20,661  Market Comparables  Market Yield (%)  10.0% - 28.8%  12.6% 
       Market Comparables  Market Quote (%)  100.0%  100% 
       Collateral Value Coverage  Net Asset Value (%)  100.0%  100% 
Structured finance securities   41,362  Discounted Cash Flow  Discount Rate (%)  12.0% - 22.0%  17.6% 
          Recovery Rate (%)  35.0% - 70.0%  70.0% 
          Prepayment Rate (%)  20.0%  20.0% 
Equity interests   83,990  Enterprise Value Waterfall  EBITDA Multiples (x)  5.5x - 28.6x  11.0x 
          Revenue Multiples (x)  1.3x - 11.2x  6.4x 
Total  $959,483             

 

* 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 28, 2022 were as follows (dollars in thousands):

 

   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted
Average*
 
First lien term loans  $631,572  Market Comparables  Market Yield (%)  6.0% - 11.3%  8.4% 
          Revenue Multiples (x)  3.5x  3.5x 
Second lien term loans   44,386  Market Comparables  Market Yield (%)  8.9% - 32.9%  15.6% 
          EBITDA Multiples (x)  7.5x  7.5x 
Unsecured term loans   15,931  Market Comparables  Market Yield (%)  22.3%  22.3% 
          Net Asset Value  100.0%  100.0% 
Structured finance securities   38,030  Discounted Cash Flow  Discount Rate (%)  10.0% - 15.0%  14,2% 
          Recovery Rate (%)  35.0% - 70.0%  70.0% 
          Prepayment Rate (%)  20.0%  20.0% 
Equity interests   75,632  Enterprise Value Waterfall  EBITDA Multiples (x)  4.0x - 28.6x  9.3x 
          Revenue Multiples (x)  1.0x - 11.7x  6.6x 
          Third-party bid  100.0%  100.0% 
Total  $805,551             

 

* The weighted average in the table above is calculated based on each investment’s fair value weighting, using the applicable unobservable input.

 

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 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, third party bid or net asset value in deriving a value, a significant increase (decrease) in the market quote, bid or net asset value in isolation, would result in a significantly higher (lower) fair value measurement.

 

F-42

 

 

The composition of our investments as of February 28, 2023 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 
First lien term loans  $808,464    83.7%  $798,534    82.1%
Second lien term loans   21,114    2.2    14,936    1.5 
Unsecured loans   21,001    2.2    20,661    2.1 
Structured finance securities   49,711    5.1    41,362    4.3 
Equity interests   66,199    6.8    97,097    10.0 
Total  $966,489    100.0%  $972,590    100.0%

 

The composition of our investments as of February 28, 2022 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 
First lien term loans  $631,037    79.3%  $631,572    77.3%
Second lien term loans   49,862    6.3    44,386    5.4 
Unsecured loans   16,104    2.0    15,931    1.9 
Structured finance securities   41,648    5.2    38,030    4.7 
Equity interests   57,597    7.2    87,648    10.7 
Total  $796,248    100.0%  $817,567    100.0%

 

For loans and debt securities for which market quotations are not readily available, we determine their fair value based on third party indicative broker quotes, where available, or the inputs that a hypothetical market participant would use to value the security in a current hypothetical sale using a market comparables valuation technique. In applying the market comparables valuation technique, we determine the fair value based on such factors as market participant inputs 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 comparables technique is not sufficient or appropriate, we may use additional techniques such as an asset liquidation or expected recovery model.

 

For equity securities of portfolio companies and partnership interests, we determine the fair value using an enterprise value waterfall valuation technique. Under the enterprise value waterfall valuation technique, 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 techniques and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The techniques 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 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.

 

F-43

 

 

Our investments in Saratoga CLO and SLF 2022 are carried at fair value, which is based on a discounted cash flow valuation technique that utilizes prepayment, re-investment and loss inputs 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 and SLF 2022, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flows, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO and SLF 2022. The cash flows use a set of inputs including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated valuations. The inputs are based on available market data and projections provided by third parties as well as management estimates. We ran Intex models based on inputs about the refinanced Saratoga CLO’s structure and the SLF 2022 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 investments in Saratoga CLO and SLF 2022 at February 28, 2023. The inputs at February 28, 2023 for the valuation model include:

 

  Default rate: 2.0%

 

  Recovery rate: 35%-70%

 

  Discount rate: 14.0%-22.0%

 

  Prepayment rate: 20.0%

 

  Reinvestment rate / price: $97.00 for eighteen months; then L+365bps / $99.00

 

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 February 28, 2023, excluding Saratoga CLO, SLF JV and SLF 2022 (see Note 4 and Note 5 for more information on Saratoga CLO, SLF JV and SLF 2022, respectively).

 

HemaTerra Holdings Company, LLC

 

HemaTerra Holding Company, LLC (“HemaTerra”) provides SaaS-based software solutions addressing complex supply chain issues across a variety of medical environments, including blood, plasma, tissue, implants and DNA sample management, to customers in blood centers, hospitals, pharmaceuticals, and law enforcement settings.

 

Buildout, Inc.

 

Buildout, Inc. provides SaaS-based real estate marketing and customer relationship management software to commercial real estate brokerages. Buildout provides a suite of software solutions brokers use to manage relationships, efficiently create and distribute marketing materials over a wide variety of channels, including direct mail, multiple listing websites, brokerage website, property specific websites and manage back office functions like commission calculations and broker productivity.

 

Artemis Wax Corp.

 

Artemis Wax Corporation is a U.S. based retail aggregator of European Wax Center (“EWC”) franchise locations with a concentration in the northeast. Founded in 2004, EWC is the largest U.S. body waxing national chain with more than 800 locations across the country.

 

Granite Comfort, LP

 

Granite Comfort, LP is a U.S. based heating, ventilation and air conditioning (“HVAC”) company. The company provides traditional service and replacement of HVAC / plumbing systems, as well as a rental model that is in the early stages of implementation.

 

F-44

 

 

Note 4. Investment in 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 of January 2020 was also added. Following this refinancing, the Saratoga CLO portfolio increased its aggregate principal amount from approximately $300.0 million 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 in 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 in aggregate amount of the Class F notes tranche at par and the $20.0 million CLO 2013-1 Warehouse Loan was repaid.

 

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.

 

On February 26, 2021, the Company completed the fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024, and extended its legal maturity to April 2033. A non-call period ended February 2022 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million of the CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. At August 31, 2021, the outstanding receivable of $2.6 million was repaid in full.

 

On August 9, 2021, the Company exchanged its existing $17.9 million Class F-R-3 Note for $8.5 million Class F-1-R-3 Notes and $9.4 million Class F-2-R-3 Notes at par. On August 11, 2021, the Company sold its Class F-1-R-3 Notes to third parties, resulting in a realized loss of $0.1 million.

 

The Saratoga CLO remains effectively 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%.

 

F-45

 

 

For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, we accrued management fee income of $3.3 million, $3.3 million and $2.5 million, respectively, and interest income of $1.2 million, $4.9 million and $3.5 million, respectively, from the Saratoga CLO.

 

As of February 28, 2023, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $21.2 million. As of February 28, 2023, the fair value of its investment in the Class F-R-3 Notes of Saratoga CLO was $8.8 million. As of February 28, 2023, Saratoga CLO had investments with a principal balance of $645.6 million and a weighted average spread over LIBOR of 3.8% and had debt with a principal balance of $611.0 million with a weighted average spread over LIBOR of 2.2%. As of February 28, 2023, the present value of the projected future cash flows of the subordinated notes, was approximately $21.2 million, using a 22.0% discount rate. The Company’s total investment in the subordinate notes of Saratoga CLO is $57.8 which consists of additional investments of $30 million in January 2008, $13.8 million in December 2018 and $14.0 million in February 2021; to date the Company has since received distributions of $77.7 million, management fees of $31.9 million and incentive fees of $1.2 million.

 

As of February 28, 2022, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $28.7 million. As of February 28, 2022, the fair value of its investment in the Class F-R-3 Notes of Saratoga CLO was $9.4 million. As of February 28, 2022, Saratoga CLO had investments with a principal balance of $660.2 million and a weighted average spread over LIBOR of 3.7% and had debt with a principal balance of $611.0 million with a weighted average spread over LIBOR of 2.2%. As of February 28, 2022, the present value of the projected future cash flows of the subordinated notes, was approximately $27.9 million, using a 15.0% discount rate. The Company’s total investment in the subordinate notes of Saratoga CLO is $57.8 million which consists of additional investments of $30 million in January 2008, $13.8 million in December 2018 and $14.0 million in February 2021; to date the Company has since received distributions of $72.8 million, management fees of $28.6 million and incentive fees of $1.2 million.

 

The separate audited financial statements of the Saratoga CLO as of February 28, 2023 and February 28, 2022, pursuant to Rule 3-09 of SEC rules Regulation S-X, and for the years ended February 28, 2023, February 28, 2022 and February 28, 2021, are presented on page S-1.

 

Note 5. Investment in SLF JV

 

On October 26, 2021, the Company and TJHA entered into the LLC Agreement to co-manage SLF JV. SLF JV is invested in Saratoga Investment Corp Senior Loan Fund 2022-1, Ltd (“SLF 2021”), which is a wholly owned subsidiary of SLF JV. SLF 2021 was formed for the purpose of making investments in a diversified portfolio of broadly syndicated first lien and second lien term loans or bonds in the primary and secondary markets.

 

On September 30, 2022, SLF 2021 was renamed to Saratoga Investment Corp Senior Loan Fund 2022-1, Ltd. (“SLF 2022”).

 

The Company and TJHA have equal voting interest on all material decisions with respect to SLF JV, including those involving its investment portfolio, and equal control of corporate governance. No management fee is charged to SLF JV as control and management of SLF JV is shared equally.

 

The Company and TJHA have committed to provide up to a combined $50.0 million of financing to SLF JV through cash contributions, with the Company providing $43.75 million and TJHA providing $6.25 million, resulting in an 87.5% and 12.5% ownership between the two parties. The financing is issued in the form of an unsecured note and equity. The unsecured note will pay a fixed rate of 10.0% per annum and is due and payable in full on June 15, 2023. As of February 28, 2023, the Company and TJHA’s investment in SLF JV consisted of an unsecured note of $17.6 million and $2.5 million, respectively; and membership interest of $17.6 million and $2.5 million, respectively. As of February 28, 2022, the Company and TJHA’s investment in SLF JV consisted of an unsecured note of $13.1 million and $1.9 million, respectively; and membership interest of $13.1 million and $1.9 million, respectively. As of February 28, 2023, and February 28, 2022, the Company’s investment in the unsecured note of SLF JV had a fair value of $17.6 million and $13.1 million, respectively, and the Company’s investment in the membership interests of SLF JV had a fair value of $13.1 million and $12.0 million, respectively.

  

The Company has determined that SLF JV is an investment company under ASC 946; however, in accordance with such guidance the Company will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary. SLF JV is not a wholly owned investment company subsidiary as the Company and TJHA each have an equal 50% voting interest in SLF JV and thus neither party has a controlling financial interest. Furthermore, ASC 810, Consolidation concludes that in a joint venture where both members have equal decision making authority, it is not appropriate for one member to consolidate the joint venture since neither has control. Accordingly, the Company does not consolidate SLF JV.

 

For the year ended February 28, 2023, the Company earned approximately $1.5 million of interest income related to SLF JV, which is included in interest income. As of February 28, 2023, approximately $0.4 million of interest income related to SLF JV was included in interest receivable.

 

For the period from October 26, 2021, through February 28, 2022, the Company earned approximately $0.1 million of interest income related to SLF JV, which is included in interest income. As of February 28, 2022, approximately $0.1 million of interest income related to SLF JV was included in interest receivable.

 

SLF JV’s initial investment in SLF 2022 was in the form of an unsecured loan. The unsecured loan paid a floating rate of LIBOR plus 7.00% per annum and was due and payable in full on June 9, 2023. The unsecured loan was repaid in full on October 28, 2022, as part of the CLO closing.

 

F-46

 

 

On October 28, 2022, SLF 2022 issued $402.1 million of the 2022 JV CLO Notes through the JV CLO trust. The 2022 JV CLO Notes were issued pursuant to the JV Indenture, with the Trustee. As part of the transaction, the Company purchased 87.50% of the Class E Notes from SLF 2022 with a par value of $12.25 million. As of February 28, 2023 and February 28, 2022, the fair value of these Class E Notes were $11.4 million and $0.0 million, respectively.

 

Note 6. Income Taxes

 

The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to U.S. federal income tax on the portion of taxable income and gains distributed to stockholders.

 

The Company owns 100.0% of Saratoga CLO, an exempted company incorporated in the Cayman Islands. For financial reporting purposes, the Saratoga CLO is not included as part of the consolidated financial statements. For U.S. federal income tax purposes, the Company has requested and received approval from the IRS to treat the Saratoga CLO as a disregarded entity. As such, for U.S. federal income tax purposes and for purposes of meeting the RIC qualification and diversification tests, the results of operations of the Saratoga CLO are included with those of the Company to qualify as a RIC. The Company is required to meet certain income and asset diversification tests in addition to timely distributing at least 90% of its investment company taxable income, as defined by the Code. Because U.S. federal income tax regulations differ from U.S. GAAP, distributions as required in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences between these distributions and U.S. GAAP financial results may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for U.S. federal income tax purposes. As of February 28, 2023 and February 28, 2022, the Company reclassified for book purposes amounts arising from permanent book/tax differences primarily related to nondeductible U.S. federal excise and capital gains tax and worthless securities losses (dollars in thousands):

 

   February 28,
2023
   February 28,
2022
 
Capital in excess of par value  $16   $(4,704)
Total distributable earnings (loss)   (16)   4,704 

 

For U.S federal income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax character of distributions paid for the years ended February 28, 2023, February 28, 2022 and February 28, 2021 was as follows (dollars in thousands):

 

   February 28, 2023   February 28, 2022   February 28, 2021 
Ordinary income  $27,313   $22,033   $13,747 
Capital gains   
-
    
-
     
Total  $27,313   $22,033   $13,747 

 

For U.S. federal income tax purposes, as of February 28, 2023, the aggregate net unrealized depreciation for all securities was $15.5 million. The aggregate cost of securities for U.S. federal income tax purposes was $1.6 billion.

 

For U.S. federal income tax purposes, as of February 28, 2022, the aggregate net unrealized appreciation for all securities was $21.2 million. The aggregate cost of securities for U.S. federal income tax purposes was $1.4 billion.

 

As of February 28, 2023 and February 28, 2022, the components of accumulated losses on a tax basis as detailed below differ from the amounts reflected per the Company’s consolidated statements of assets and liabilities by temporary book/tax differences primarily arising from the consolidation of the Saratoga CLO for U.S federal tax purposes, market discount and original issue discount income, interest income accrual on defaulted bonds, write-off of investments, and amortization of organizational expenditures and partnership interests (dollars in thousands).

 

   February 28,
2023
   February 28,
2022
 
Post October loss deferred  $
-
   $
-
 
Accumulated capital losses   (1,580)   (1,143)
Other temporary differences   1,971    (1,601)
Undistributed Long Term Gain   
-
    
-
 
Undistributed ordinary income   19,771    9,897 
Unrealized appreciation (depreciation)   (15,500)   21,283 
Total components of accumulated losses  $4,662   $28,436 

 

F-47

 

 

At February 28, 2023, the Company had a short-term capital loss of $0.0 million and a long-term capital loss of $1.6 million, available to offset future capital gains. At February 28, 2023 the company did not utilized any short-term capital losses or long-term capital losses. Post RIC-modernization act losses are deemed to arise on the first day of the fund’s following fiscal year and there is no expiration for these losses.

 

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% U.S. federal 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. For the calendar years ended December 31, 2022 and December 31, 2021, the Company did not distribute at least 98% of its ordinary income and 98.2% of its capital gains and accrued $1.1 million and $0.7 million in U.S. federal excise taxes on undistributed taxable income for the years ended February 28, 2023 and February 28, 2022, respectively.

 

As of February 28, 2023 and 2022, the Company had net long-term capital losses of $1.6 million and $1.1 million.

 

Management has analyzed the Company’s tax positions taken on U.S. federal income tax returns for all open years (fiscal years 2019- 2022) and has concluded that no provision for uncertain income tax positions is required in the Company’s consolidated financial statements.

 

SIA-ARC, Inc., SIA-Avionte, Inc., SIA-AX, Inc., SIA-G4, Inc., SIA-GH, Inc., SIA-MAC, Inc., SIA-PP 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 U.S. federal and state tax purposes. As separately regarded entities for tax purposes, these entities are subject to U.S. federal income tax 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 arising from net operating losses and unrealized appreciation and deprecation 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. In February 2022, SIA-GH, Inc., SIA-TT Inc. and SIA-VR, Inc. received an approved plan of liquidation following the sale of equity held by each of the portfolio companies.

 

The Company’s V Rental Holdings LLC Class A-1 membership units was sold during the ended February 28, 2022. The entity which held this investment, SIA-VR, Inc. will remain in existence for a period of time until all ongoing indemnification obligations are settled, after which it will be dissolved. For purposes of tax accounting, the Company had an $0.1 million current tax receivable as of February 28, 2023.

 

The Company’s Texas Teachers of Tomorrow, LLC common stock was sold during the year ended February 28, 2022. The entity which held this investment, SIA-TT, Inc. will remain in existence for a period of time until all ongoing indemnification obligations are settled, after which it will be dissolved. For purposes of tax accounting, the Company had an $0.1 million current tax receivable as of February 28, 2023.

 

The Company’s GreyHeller LLC Series A preferred units was sold during the year ended February 28, 2022. The entity which held this investment, SIA-TT, Inc. will remain in existence for a period of time until all ongoing indemnification obligations are settled, after which it will be dissolved. For purposes of tax accounting, the Company had an $0.4 million current tax receivable as of February 28, 2023.

 

F-48

 

 

The Company may distribute a portion of its realized net long term capital gains in excess of realized net short term capital losses to its stockholders, but may also decide to retain a portion, or all, of its net capital gains and elect to pay the 21% U.S. federal tax on the net capital gain, potentially in the form of a “deemed distribution” to its stockholders.  Income tax (provision) relating to an election to retain its net capital gains, including in the form of a deemed distribution, is included as a component of income tax (provision) benefit from realized gains on investments, depending on the character of the underlying taxable income (ordinary or capital gains), on the consolidated statements of operations. 

 

Deferred tax assets and liabilities, and related valuation allowances, as of February 28, 2023 and February 28, 2022, were as follows:

 

   February 28, 2023   February 28, 2022 
Total deferred tax assets  $2,542,373  $1,991,241 
Total deferred tax liabilities   (3,008,829)   (1,293,496)
Valuation allowance on net deferred tax assets   (2,350,116)   (1,946,761)
Net deferred tax liability  $(2,816,572)  $(1,249,016)

 

As of February 28, 2023, the valuation allowance on deferred tax assets was $2.4 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 year ended February 28, 2023 includes $1.7 million net change in unrealized appreciation (depreciation) on investments and $(0.2) million net change in total operating expense (benefit), in the consolidated statement of operations, respectively.

 

Net deferred tax (benefit) expense for the year ended February 28, 2022 includes $(0.7) 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 year ended February 28, 2021 includes $0.6 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.

 

Deferred tax temporary differences may include differences for state taxes and joint venture interests.

 

Federal and state income tax provisions (benefits) on investments for the year ended February 28, 2023, February 28, 2022 and February 28, 2021 are as follows: 

 

   February 28, 2023   February 28, 2022   February 28, 2021 
Current            
Federal  $(473,475)  $2,498,515   $
-
 
State   (80,273)   327,021    
-
 
Net current expense   (553,748)   2,825,536    
-
 
Deferred               
Federal   1,467,975    (444,628)   461,503 
State   99,582    (227,737)   113,798 
Net deferred expense   1,567,557    (672,365)   575,301 
Net tax provision  $1,013,809   $2,153,171   $575,301 

 

The Company has remaining federal net operating loss carryforwards of $3.7 million which has an indefinite life. In addition, the Company has state net operating loss carryforwards of $0.1 million, which begin to expire in fiscal year 2028.

 

Income tax expense was computed by applying the U.S. federal statutory rate of 21% combined with the weighted average state tax rate applicable to each taxable blocker based on the states they operate in.

 

F-49

 

 

Note 7. 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 from its effective date, with one-year renewals thereafter subject to certain approvals by our board of directors and/or the Company’s stockholders. Most recently, on July 5, 2022, 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 quarterly report on Form 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 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 years ended February 28, 2023, February 28, 2022 and February 28, 2021, the Company incurred $16.4 million, $11.9 million and $9.1 million in base management fees, respectively. For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, the Company incurred $6.8 million, $6.4 million and $5.4 million in incentive fees related to pre-incentive fee net investment income. For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, we accrued $(1.8) million, $5.5 million and $0.0 million, respectively, in incentive fees related to capital gains.

 

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 February 28, 2023, the base management fees accrual was $4.3 million and the incentive fees accrual was $7.9 million and is included in base management and incentive fees payable in the accompanying consolidated statements of assets and liabilities. As of February 28, 2022, the base management fees accrual was $3.2 million and the incentive fees accrual was $9.8 million and is included in base management and incentive fees payable in the accompanying consolidated statements of assets and liabilities.

 

F-50

 

 

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 from its effective date, with one-year renewals thereafter 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. Most recently, on July 5, 2022, 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 $3.0 million to $3.275 million effective August 1, 2022.

 

For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, we recognized $3.2 million, $2.9 million and $2.5 million in administrator expenses, respectively, pertaining to bookkeeping, recordkeeping and other administrative services provided to us in addition to our allocable portion of rent and other overhead related expenses. As of February 28, 2023, $0.001 million of administrator expenses were accrued and included in due to manager in the accompanying consolidated statements of assets and liabilities. As of February 28, 2022, $0.3 million of administrator expenses were accrued and included in due to manager in the accompanying consolidated statements of assets and liabilities.

 

Saratoga CLO

 

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, to be reimbursed from future equity distributions. During the year ended February 29, 2020, the Company received full payment of $1.7 million from the Saratoga CLO for such transaction costs.

 

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 26, 2021, the Company completed the fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024, and extended its legal maturity to April 2033. The non-call period was extended to February 2022. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. At August 31, 2021, the outstanding receivable of 2.6 million was repaid in full.

 

On August 9, 2021, the Company exchanged its existing $17.9 million Class F-R-3 Notes for $8.5 million Class F-1-R-3 Notes and $9.4 million Class F-2-R-3 Notes at par. On August 11, 2021, the Company sold its Class F-1-R-3 Notes to third parties, resulting in a realized loss of $0.1 million.

  

During the year ended February 28, 2021, the maximum amount invested by the Company in the CLO 2013-1 Warehouse 2 Loan amounted to $25.0 million, with interest income of $0.7 million recognized related to the CLO 2013-1 Warehouse 2 Loan and is included in interest from investments on the Company’s consolidated statement of operations for the year ended February 28, 2021.

 

For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, we recognized $3.3 million, $3.3 million and $2.5 million in management fee income, respectively, related to the Saratoga CLO.

 

For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, the Company neither bought nor sold any investments from the Saratoga CLO.

 

F-51

 

 

SLF JV

 

On October 26, 2021, the Company and TJHA entered into an LLC Agreement to co-manage the SLF JV. SLF JV is a joint venture that invests in the debt or equity interests of collateralized loan obligations, loan, notes and other debt instruments.

 

On October 28, 2022, SLF 2022 issued $402.1 million of the 2022 JV CLO Notes through the JV CLO trust. The 2022 JV CLO Notes were issued pursuant to the JV Indenture, with the Trustee.

 

As of February 28, 2023 and February 28, 2022 respectively, the Company’s investment in the SLF JV had a fair value of $30.7 million and $25.1 million, consisting of an unsecured loan of $17.6 million and $13.1 million, and membership interest of $13.1 million and $12.0 million. In addition, the Company has no outstanding receivable balance from the SLF JV, as of February 28, 2023.

 

As part of the JV CLO trust transaction, the Company purchased 87.50% of the Class E Notes from SLF 2022 with a par value of $12.25 million.

 

Note 8. 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% after giving effect to such leverage, or, 150% if certain requirements under the 1940 Act are met. On April 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into law on March 23, 2018, our board of directors, including a majority of our directors who are not “interested persons” (as defined in Section 2(a)(19) of the 1940 Act”) of the Company (“independent directors”), approved a minimum asset coverage ratio of 150%. The 150% asset coverage ratio became effective on April 16, 2019. 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 165.9% as of February 28, 2023 and 209.3% as of February 28, 2022.

 

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 with Madison Capital Funding LLC (the “Madison Credit Facility”), 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, SBIC II LP and SBIC III LP, was pledged under the Madison Credit Facility to secure our obligations thereunder.

 

F-52

 

 

On February 24, 2012, we amended the Madison Credit Facility to, among other things:

 

  expand the borrowing capacity under the Madison Credit Facility from $40.0 million to $45.0 million;

 

  extend the period during which we may make and repay borrowings under the Madison 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 Madison 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 Madison 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 Madison Credit Facility from February 24, 2020 to September 17, 2022 (unless terminated sooner upon certain events);

 

  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 Madison 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 Madison 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 Madison 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.

 

On September 14, 2020, we entered into a fifth amendment to the Madison Credit Facility to, among other things:

 

  extend the commitment termination date of the Madison 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.

 

On September 13, 2021, we entered into a sixth amendment to the Madison Credit Facility to, among other things:

 

  Extend the commitment termination date of the Madison Credit Facility from September 17, 2021 to October 1, 2021, with no change to maturity date of September 17, 2025.

 

F-53

 

 

On October 4, 2021, all outstanding amounts on the Madison Credit Facility were repaid and the Madison Credit Facility was terminated. The repayment and termination of the Madison Credit Facility resulted in a realized loss on the extinguishment of debt of $0.8 million.

 

In addition to any fees or other amounts payable under the terms of the Madison Credit Facility, an administrative agent fee per annum equal to $0.1 million is payable in equal monthly installments in arrears.

 

Encina Credit Facility

 

On October 4, 2021, the Company entered into the Credit and Security Agreement (the “Credit Agreement”) relating to a $50.0 million senior secured revolving credit facility with the Lender, supported by loans held by SIF II and pledged to the Encina Credit Facility. The terms of the Encina Credit Facility required a minimum drawn amount of $12.5 million at all times during the first six months following the closing date, which increased to the greater of $25.0 million or 50% of the commitment amount in effect at any time thereafter. The term of the Encina Credit Facility is three years. Advances under the Encina Credit Facility originally bore interest at a floating rate per annum equal to LIBOR plus 4.0%, with LIBOR having a floor of 0.75%, with customary provisions related to the selection by the Lender and the Company of a replacement benchmark rate. The commitment termination date was October 4, 2024.

 

On January 27, 2023, we entered into the first amendment to the Credit Agreement to, among other things:

 

  increased the borrowings available under the Encina Credit Facility from up to $50.0 million to up to $65.0 million;

 

  changed the underlying benchmark used to compute interest under the Credit Agreement from LIBOR to Term SOFR for a one-month tenor plus a 0.10% credit spread adjustment;

 

  increased the applicable effective margin rate on borrowings from 4.00% to 4.25%;

 

  extended the revolving period from October 4, 2024 to January 27, 2026;

 

  extended the period during which the borrower may request one or more increases in the borrowings available under the Encina Credit Facility (each such increase, a “Facility Increase”) from October 4, 2023 to January 27, 2025, and increased the maximum borrowings available pursuant to such Facility Increase from $75.0 million to $150.0 million;

 

  revised the eligibility criteria for eligible collateral loans to exclude certain industries in which an obligor or related guarantor may be involved; and

 

  amended the provisions permitting the borrower to request an extension in the Commitment Termination Date (as defined in the Credit Agreement) to allow requests to extend any applicable Commitment Termination Date, rather than a one-time request to extend the original Commitment Termination Date, subject to a notice requirement.

 

In addition to any fees or other amounts payable under the terms of the Encina Credit Facility, an administrative agent fee per annum equal to $0.1 million is payable in equal monthly installments in arrears.

 

As of February 28, 2023 and February 28, 2022, there were $32.5 million and $12.5 million outstanding borrowings under the Encina Credit Facility. During the applicable periods, the Company was in compliance with all of the limitations and requirements of the facility. Financing costs of $2.0 million related to the Encina Credit Facility have been capitalized and are being amortized over the term of the facility, with all existing financing costs amortized through January 27, 2026 from the date of the amendment and extension. For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, we recorded $2.0 million, $0.8 million and $0.5 million of interest expense related to the Encina Credit Facility and the Madison Credit Facility, respectively, which includes commitment and administrative agent fees.

 

For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, we recorded $0.5 million, $0.3 million and $0.1 million of amortization of deferred financing costs related to the Encina Credit Facility and Madison Credit Facility, respectively. Interest expense and amortization of deferred financing costs are reported as interest and debt financing expenses on the consolidated statements of operations. For the fiscal year ended February 28, 2023, the average borrowings outstanding and the weighted average interest rate on outstanding borrowings under the Encina Credit Facility and the Madison Credit Facility were approximately $26.3 million and 6.72%, respectively. For the fiscal year ended February 28, 2022, the average borrowings outstanding and the weighted average interest rate on outstanding borrowings under the Encina Credit Facility and the Madison Credit Facility were approximately $8.7 million and 5.22%, respectively. For the fiscal year ended February 28, 2021, the average borrowings outstanding and the weighted average interest rate on outstanding borrowings under the Madison Credit Facility were approximately $1.8 million and 0.17%, respectively.

 

F-54

 

 

The Encina 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 Encina 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 Encina Credit Facility has a three-year term. Availability on the Encina 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 SOFR rate, plus an applicable effective margin of 4.25%. In addition, the Company will pay the lender 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 Encina Credit Facility.

 

Our borrowing base under the Encina Credit Facility was $63.6 million subject to the Encina Credit Facility cap of $65.0 million at February 28, 2023. 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 February 28, 2023 borrowing base relies upon the valuations set forth in the Quarterly Report on Form 10-Q for the period ended November 30, 2022. The valuations presented in this Quarterly Report on Form 10-Q will not be incorporated into the borrowing base until after this Annual Report on Form 10-K 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 in respective SBIC) and is subject to customary regulatory requirements including but not limited to, a periodic examination by the SBA.

 

Our wholly owned Subsidiaries, SBIC LP, SBIC II LP, and SBIC III LP, received an SBIC license from the SBA on March 28, 2012, August 14, 2019, and September 29, 2022, respectively. SBIC LP’s license provided up to $150.0 million in additional long-term capital in the form of SBA debentures, while SBIC II LP’s and SBIC III LP’s SBIC licenses provide up to $175.0 million each. Under current SBIC regulations, for two or more SBICs under common control, the maximum amount of outstanding SBA debentures cannot exceed $350.0 million.  With the third license approval, Saratoga can continue to grow its SBA relationship from $150.0 million to $350.0 million of committed capital.

 

As of February 28, 2023, we have funded SBIC LP, SBIC II LP and SBIC III LP with an aggregate total of equity capital of $75.0 million, $87.5 million and $2.5 million, respectively, and have $202.0 million in SBA-guaranteed debentures outstanding, of which $27.0 million was held in SBIC LP, $175.0 million held was SBIC II LP and $0.0 million held in SBIC III LP.

 

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 $24.0 million and have average annual fully taxed net income not exceeding $8.0 million for the two most recent fiscal years. In addition, an SBIC must devote 25.0% of its investment activity to “smaller enterprises’’ as defined by the SBA. A smaller enterprise 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.

 

The SBIC Subsidiaries 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 the SBIC Subsidiaries will receive SBA-guaranteed debenture funding, which is dependent upon the SBIC Subsidiaries continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to each SBIC Subsidiaries’ assets over our stockholders and debtholders in the event we liquidate such SBIC Subsidiary or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC Subsidiary upon an event of default.

 

F-55

 

 

The Company received exemptive relief from the SEC to permit it to exclude the senior securities issued by SBIC subsidiaries 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 requirement 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 independent directors of the Company approved of the Company becoming subject to a minimum asset coverage ratio of 150% from 200% under Sections 18(a)(1) and 18(a)(2) of the Investment Company Act, as amended. The 150% asset coverage ratio became effective on April 16, 2019.

 

At February 28, 2023 and February 28, 2022, there was $202.0 million and $185.0 million outstanding of SBA debentures, respectively. 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, $6.0, and $0.4 million related to the SBA debentures issued by SBIC LP, SBIC II LP and SBIC III LP, respectively, have been capitalized and are being amortized over the term of the commitment and drawdown. During the year ended February 28, 2023, the Company repaid $59.0 million of SBA debentures, resulting in a realized loss on extinguishment of $0.6 million related to the acceleration of deferred debt financing costs.

 

For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, we recorded $6.4 million, $4.7 million and $5.5 million of interest expense related to the SBA debentures, respectively. For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, we recorded $1.0 million, $0.7 million and $0.6 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 years ended February 28, 2023, February 28, 2022 and February 28, 2021 on the outstanding borrowings of the SBA debentures was 2.78%, 2.60% and 3.25%, respectively. During the years ended February 28, 2023 and February 28, 2022, the average dollar amount of SBA debentures outstanding was $229.9 million and $180.4 million, respectively.

 

Notes

 

On May 10, 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 units of the 2022 Notes 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 (as described above), 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 note and have been delisted following the redemption.

 

F-56

 

 

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. 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 were amortized over the term of the 6.25% 2025 Notes.

 

On February 5, 2019, the Company issued an additional $20.0 million in aggregate principal amount of the 6.25% 2025 Notes 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. The additional 6.25% 2025 Notes were treated as a single series with the existing 6.25% 2025 Notes under the indenture and had the same terms as the existing 6.25% 2025 Notes. 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.

 

On August 31, 2021, the Company redeemed $60.0 million in aggregate principal amount of issued and outstanding 6.25% 2025 Notes. The 6.25% 2025 Notes were listed on the NYSE under the trading symbol of “SAF”, and have been delisted following the full redemption on August 31, 2021.

 

At August 31, 2021, the debt was extinguished. As such, it was not fair valued with market quotes and is not fair value leveled. As of February 28, 2021, the carrying amount and fair value of the 6.25% 2025 Notes was $60.0 million and $61.2 million, respectively. The repayment of the 6.25% 2025 Notes resulted in a realized loss on the extinguishment of debt of $1.5 million.

 

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.

 

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 $0.2 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% 2025 Notes. 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 were being amortized over the term of the 7.25% 2025 Notes.

 

On July 14, 2022, the Company redeemed $43.1 million in aggregate principal amount of the issued and outstanding 7.25% 2025 Notes. The 7.25% 2025 Notes were listed on the NYSE under the trading symbol of “SAK” and have been delisted following the full redemption on July 14, 2022.

 

On July 14, 2022, the debt was extinguished. As such, it was not fair valued with market quotes and is not fair value leveled. The repayment of the 7.25% 2025 Notes resulted in a realized loss on the extinguishment of debt of $1.0 million.

 

For the years ended February 28, 2023 and February 28, 2022, we recorded $1.2 million and $3.1 million, respectively, of interest expense and $0.1 million and $0.3 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. For the year ended February 28, 2023 and February 28, 2022, the average dollar amount of 7.25% 2025 Notes outstanding was $13.5 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% 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% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.75% per year. The 7.75% 2025 Notes 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 subject to a fee depending on the date of repayment. 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% 2025 Notes have been capitalized and are being amortized over the term of the 7.75% 2025 Notes.

 

F-57

 

 

As of February 28, 2023, the total 7.75% 2025 Notes outstanding was $5.0 million. The 7.75% 2025 Notes are not listed and have a par value of $25.00 per note. The carrying amount of the outstanding 7.75% 2025 Notes had a fair value of $4.9 million, which is based on a market yield analysis and would be classified as a Level 3 liability within the fair value hierarchy.

 

For the years ended February 28, 2023 and February 28, 2022, we recorded $0.4 million and $0.4 million, respectively, of interest expense and $0.05 million and $0.05 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. For the year ended February 28, 2023 and February 28, 2022, the average dollar amount of 7.75% 2025 Notes outstanding was $5.0 million and $5.0 million, respectively.

 

On December 29, 2020, the Company issued $5.0 million aggregate principal amount of our 6.25% fixed-rate notes due in 2027 (the “6.25% 2027 Notes”).  Offering costs incurred were approximately $0.1 million.  Interest on the 6.25% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year. The 6.25% 2027 Notes mature on December 29, 2027 and may be redeemed in whole or in part at any time or from time to time at our option, on or after December 29, 2024. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.1 million related to the 6.25% 2027 Notes have been capitalized and are being amortized over the term of the Notes.

 

On January 28, 2021, the Company issued $10.0 million aggregate principal amount of the 6.25% 2027 Notes for net proceeds of $9.7 million after deducting underwriting commissions of approximately $0.3 million. Offering costs incurred were approximately $0.1 million. Interest on the 6.25% 2027 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 February 28, 2021. The 6.25% 2027 Notes mature on January 28, 2027 and commencing January 28, 2023, 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 $0.4 million related to the 6.25% 2027 Notes have been capitalized and are being amortized over the term of the 6.25% 2027 Notes. The 6.25% 2027 Notes are not listed and have a par value of $25.00 per note.

 

As of February 28, 2023, the total 6.25% 2027 Notes outstanding was $15.0 million. The 6.25% 2027 Notes are not listed and have a par value of $25.00 per note. The carrying amount of the outstanding 6.25% 2027 Notes had a fair value of $13.7 million, which is based on a market yield analysis and would be classified as a Level 3 liability within the fair value hierarchy.

 

For the years ended February 28, 2023 and February 28, 2022, we recorded $0.9 million and $0.9 million, respectively, of interest expense and $0.07 million and $0.07 million, respectively, of amortization of deferred financing costs related to the 6.25% 2027 Notes. Interest expense and amortization of deferred financing cost are reported as interest and debt financing expense on the consolidated statements of operations. For the year ended February 28, 2022 and February 28, 2022, the average dollar amount of 6.25% 2027 Notes outstanding was $15.0 million and $15.0 million, respectively.

 

On March 10, 2021, the Company issued $50.0 million aggregate principal amount of our 4.375% fixed-rate Notes due in 2026 (the “4.375% 2026 Notes”) for net proceeds of $49.0 million after deducting underwriting commissions of approximately $1.0 million. Offering costs incurred were approximately $0.3 million.  Interest on the 4.375% 2026 Notes is paid semi-annually in arrears on February 28 and August 28, at a rate of 4.375% per year. The 4.375% 2026 Notes mature on February 28, 2026 and may be redeemed in whole or in part at any time on or after November 28, 2025 at par plus a “make-whole” premium, and thereafter at par. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.3 million related to the 4.375% 2026 Notes have been capitalized and are being amortized over the term of the 4.375% 2026 Notes.

 

On July 15, 2021, the Company issued an additional $125.0 million aggregate principal amount of the Company’s 4.375% 2026 Notes (the “Additional 4.375% 2026 Notes”) for net proceeds for approximately $123.5 million, based on the public offering price of 101.00% of the aggregate principal amount of the Additional 4.375% 2026 Notes, after deducting the underwriting discount of $2.5 million and the offering payable by the Company. The Additional 4.375% 2026 Notes are treated as a single series with the existing 4.375% 2026 Notes under the indenture and had the same terms as the existing 4.375% 2026 Notes. The net proceeds from the offering were used to redeem all of the outstanding 6.25% 2025 Notes (as described above), and for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $2.7 million have been capitalized and are being amortized over the term of the additional 4.375% 2026 Notes.

 

F-58

 

 

As of February 28, 2023, the total 4.375% 2026 Notes outstanding was $175.0 million. The 4.375% 2026 Notes are not listed and are issued in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. As of February 28, 2022, there was $175.0 million outstanding. The carrying amount of the outstanding 4.375% 2026 Notes had a fair value of $156.1 million, which is based on a market yield analysis and would be classified as a Level 3 liability within the fair value hierarchy.

 

For the years ended February 28, 2023 and February 28, 2022, we recorded $7.7 million and $5.5 million, respectively, of interest expense, $0.8 million and $0.4 million, respectively, of amortization of deferred financing costs and $0.3 million and $0.2 million, respectively, of amortization of premium on issuance of 4.375% Notes due 2026 (inclusive of the issuance of the Additional 4.375% 2026 Notes). Interest expense, amortization of deferred financing costs and amortization of premium on issuance of notes are reported as interest and debt financing expense on the consolidated statements of operations. During the years ended February 28, 2023 and February 28, 2022, the average dollar amount of 4.375% 2026 Notes outstanding was $175.0 million and $130.8 million respectively.

 

On January 19, 2022, the Company issued $75.0 million aggregate principal amount of our 4.35% fixed-rate Notes due in 2027 (the “4.35% 2027 Notes”) for net proceeds of $73.0 million, based on the public offering price of 99.317% of the aggregate principal amount of the 4.35% 2027 Notes, after deducting the underwriting commissions of approximately $1.5 million. Offering costs incurred were approximately $0.3 million.  Interest on the 4.35% 2027 Notes is paid semi-annually in arrears on February 28 and August 28, at a rate of 4.35% per year. The 4.35% 2027 Notes mature on February 28, 2027 and may be redeemed in whole or in part at the Company’s option at any time prior to November 28, 2026, at par plus a “make-whole” premium, and thereafter at par. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.8 million related to the 4.35% 2027 Notes have been capitalized and are being amortized over the term of the 4.35% 2027 Notes.

 

As of February 28, 2023, the total 4.35% 2027 Notes outstanding was $75.0 million. The 4.35% 2027 Notes are not listed. As of February 28, 2022, there was $75.0 million outstanding. The carrying amount of the outstanding 4.35% 2027 Notes had a fair value of $64.5 million, which is based on a market yield analysis and would be classified as a Level 3 liability within the fair value hierarchy.

 

For the years ended February 28, 2023 and February 28, 2022, we recorded $3.3 million and $0.4 million, respectively, of interest expense, $0.3 million and $0.05 million, respectively, of amortization of deferred financing costs and $0.09 million and $0.07 million, respectively, of amortization of discount on issuance of 4.35% Notes due 2027 (inclusive of the issuance of the Additional 4.35% 2027 Notes). Interest expense, amortization of deferred financing costs and amortization of discount on issuance of notes are reported as interest and debt financing expense on the consolidated statements of operations. During the years ended February 28, 2023 and February 28, 2022, the average dollar amount of 4.35% 2027 Notes outstanding was $75.0 million and $8.4 million respectively.

 

On April 27, 2022, the Company issued $87.5 million in aggregate principal amount of our 6.00% fixed-rate notes due 2027 (the “6.00% 2027 Notes”) for net proceeds of $84.8 million after deducting underwriting commissions of approximately $2.7 million. Offering costs incurred were approximately $0.1 million. On May 10, 2022, the underwriters partially exercised their option to purchase an additional $10.0 million in aggregate principal amount of the 6.00% 2027 Notes. Net proceeds to the Company were $9.7 million after deducting underwriting commissions of approximately $0.3 million. Interest on the 6.00% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.00% per year. The 6.00% 2027 Notes mature on April 30, 2027 and commencing April 27, 2024, 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 $3.3 million related to the 6.00% 2027 Notes have been capitalized and are being amortized over the term of the 6.00% 2027 Notes. The 6.00% 2027 Notes are listed on the NYSE under the trading symbol “SAT” with a par value of $25.00 per note.

 

On August 15, 2022, the Company issued an additional $8.0 million in aggregate principal amount of the 6.00% 2027 Notes (the “Additional 6.00% 2027 Notes”) for net proceeds of $7.8 million, based on the public offering price of 97.80% of the aggregate principal amount of the 6.00% 2027 Notes. The Additional 6.00% 2027 Notes are treated as a single series with the existing 6.00% 2027 Notes under the indenture and had the same terms as the existing 6.00% 2027 Notes. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Additional offering costs incurred were approximately $0.2 million. Additional financing costs of $0.2 million related to the 6.00% 2027 Notes have been capitalized and are being amortized over the term of the 6.00% 2027 Notes.

 

F-59

 

 

As of February 28, 2023, the total 6.00% 2027 Notes outstanding was $105.5 million. The 6.00% 2027 Notes are listed on the NYSE under the trading symbol “SAT” with a par value of $25.00 per note. As of February 28, 2023, the carrying amount and fair value of the 6.00% 2027 Notes was $105.5 million and $100.4 million, respectively. The fair value of the 6.00% 2027 Notes, which are 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.

 

On September 8, 2022, the Company issued $12.0 million in aggregate principal amount of our 7.00% fixed-rate notes due 2025 (the “7.00% 2025 Notes”) for net proceeds of $11.6 million after deducting customary fees and offering expenses of approximately $0.4 million. Interest on the 7.00% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.00% per year. The 7.00% 2025 Notes mature on September 8, 2025 and commencing September 8, 2024, 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 $0.05 million related to the 7.00% 2025 Notes have been capitalized and are being amortized over the term of the 7.00% 2025 Notes.

 

As of February 28, 2023, the total 7.00% 2025 Notes outstanding was $12.0 million. The 7.00% 2025 Notes are not listed. As of February 28, 2022, there was $0.0 million outstanding. The carrying amount of the outstanding 7.00% 2025 Notes had a fair value of $11.5 million, which is based on a market yield analysis and would be classified as a Level 3 liability within the fair value hierarchy.

 

For the years ended February 28, 2023 and February 28, 2022, we recorded $0.4 million and $0.0 million, respectively, of interest expense, $0.01 million and $0.00 million, respectively, of amortization of deferred financing costs and $0.06 million and $0.00 million, respectively, of amortization of discount on issuance of 7.00% Notes due 2025. Interest expense, amortization of deferred financing costs and amortization of discount on issuance of notes are reported as interest and debt financing expense on the consolidated statements of operations. During the years ended February 28, 2023 and February 28, 2022, the average dollar amount of 7.00% 2025 Notes outstanding was $5.8 million and $0.0 million respectively.

 

On October 27, 2022, the Company issued $40.0 million in aggregate principal amount of our 8.00% fixed-rate notes due 2027 (the “8.00% 2027 Notes”) for net proceeds of $38.7 million after deducting underwriting commissions of approximately $1.3 million. Offering costs incurred were approximately $0.2 million. On November 10, 2022, the underwriters partially exercised their option to purchase an additional $6.0 million in aggregate principal amount of the 8.00% 2027 Notes. Net proceeds to the Company were $5.8 million after deducting underwriting commissions of approximately $0.2 million. Interest on the 8.00% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 8.00% per year, beginning February 28, 2023. The 8.00% 2027 Notes mature on October 31, 2027 and commencing October 27, 2024, 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 $1.7 million related to the 8.00% 2027 Notes have been capitalized and are being amortized over the term of the 8.00% 2027 Notes. The 8.00% 2027 Notes are listed on the NYSE under the trading symbol “SAJ” with a par value of $25.00 per note.

 

As of February 28, 2023, the total 8.00% 2027 Notes outstanding was $46.0 million. The 8.00% 2027 Notes are listed on the NYSE under the trading symbol “SAJ” with a par value of $25.00 per note. As of February 28, 2023, the carrying amount and fair value of the 8.00% 2027 Notes was $46.0 million and $46.4 million, respectively. The fair value of the 8.00% 2027 Notes, which are 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.

 

On December 13, 2022, the Company issued $52.5 million in aggregate principal amount of our 8.125% fixed-rate notes due 2027 (the “8.125% 2027 Notes”) for net proceeds of $50.8 million after deducting underwriting commissions of approximately $1.6 million. Offering costs incurred were approximately $0.1 million. On December 21, 2022, the underwriters partially exercised their option to purchase an additional $7.9 million in aggregate principal amount of its 8.125% 2027 Notes. Net proceeds to the Company were $7.6 million after deducting underwriting commissions of approximately $0.2 million. Interest on the 8.125% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 8.125% per year, beginning February 28, 2023.  The 8.125% 2027 Notes mature on December 31, 2027 and commencing December 13, 2024, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from this offering were used to make investments in middle-market companies (including investments made through our SBIC Subsidiaries) in accordance with our investment objective and strategies and for general corporate purposes. Financing costs of $2.0 million related to the 8.125% 2027 Notes have been capitalized and are being amortized over the term of the 8.125% 2027 Notes. The 8.125% 2027 Notes are listed on the NYSE under the trading symbol “SAY” with a par value of $25.00 per share.

 

As of February 28, 2023, the total 8.125% 2027 Notes outstanding was $60.4 million. The 8.125% 2027 Notes are listed on the NYSE under the trading symbol “SAY” with a par value of $25.00 per note. As of February 28, 2023, the carrying amount and fair value of the 8.125% 2027 Notes was $60.4 million and $61.1 million, respectively. The fair value of the 8.125% 2027 Notes, which are 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.

 

Senior Securities

 

Information about our senior securities is shown in the following table as of February 28/29 for the fiscal years indicated in the table, unless otherwise noted. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial condition, liquidity and capital resources” for more detailed information regarding the senior securities.

 

F-60

 

 

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 Encina Lender Finance, LLC                
Fiscal year 2023 (as of February 28, 2023)  $32,500   $1,659    
-
    N/A 
Fiscal yaer 2022 (as of February 28, 2022)  $12,500   $2,093    
-
    N/A 
Credit Facility with Madison Capital Funding(14)                    
Fiscal year 2021 (as of February 28, 2021)  $
-
   $3,471    
-
    N/A 
Fiscal year 2020 (as of February 29, 2020)  $
-
   $6,071    
-
    N/A 
Fiscal year 2019 (as of February 28, 2019)  $
-
   $2,345    
-
    N/A 
Fiscal year 2018 (as of February 28, 2018)  $
-
   $2,930    
-
    N/A 
Fiscal year 2017 (as of February 28, 2017)  $
-
   $2,710    
-
    N/A 
Fiscal year 2016 (as of February 29, 2016)  $
-
   $3,025    
-
    N/A 
Fiscal year 2015 (as of February 28, 2015)  $9,600   $3,117    
-
    N/A 
Fiscal year 2014 (as of February 28, 2014)  $
-
   $3,348    
-
    N/A 
Fiscal year 2013 (as of February 28, 2013)  $24,300   $5,421    
-
    N/A 
Fiscal year 2012 (as of February 29, 2012)  $20,000   $5,834    
-
    N/A 
Fiscal year 2011 (as of February 28, 2011)  $4,500   $20,077    
-
    N/A 
Fiscal year 2010 (as of February 28, 2010)  $
-
   $
-
    
-
    N/A 
Fiscal year 2009 (as of February 28, 2009)  $
-
   $
-
    
-
    N/A 
Fiscal year 2008 (as of February 29, 2008)  $
-
   $
-
    
-
    N/A 
Fiscal year 2007 (as of February 28, 2007)  $
-
   $
-
    
-
    N/A 
7.50% Notes due 2020(7)                    
Fiscal year 2017 (as of February 28, 2017)  $
-
   $
-
    
-
    N/A 
Fiscal year 2016 (as of February 29, 2016)  $61,793   $3,025    
-
   $25.24(8)
Fiscal year 2015 (as of February 28, 2015)  $48,300   $3,117    
-
   $25.46(8)
Fiscal year 2014 (as of February 28, 2014)  $48,300   $3,348    
-
   $25.18(8)
Fiscal year 2013 (as of February 28, 2013)  $
-
   $
-
    
-
    N/A 
Fiscal year 2012 (as of February 29, 2012)  $
-
   $
-
    
-
    N/A 
Fiscal year 2011 (as of February 28, 2011)  $
-
   $
-
    
-
    N/A 
Fiscal year 2010 (as of February 28, 2010)  $
-
   $
-
    
-
    N/A 
Fiscal year 2009 (as of February 28, 2009)  $
-
   $
-
    
-
    N/A 
Fiscal year 2008 (as of February 29, 2008)  $
-
   $
-
    
-
    N/A 
Fiscal year 2007 (as of February 28, 2007)  $
-
   $
-
    
-
    N/A 
6.75% Notes due 2023(9)                    
Fiscal year 2020 (as of February 29, 2020)  $
-
   $
-
    
-
    N/A 
Fiscal year 2019 (as of February 28, 2019)  $74,451   $2,345    
-
   $25.74(10)
Fiscal year 2018 (as of February 28, 2018)  $74,451   $2,930    
-
   $26.05(10)
Fiscal year 2017 (as of February 28, 2017)  $74,451   $2,710    
-
   $25.89(10)
6.25% Notes due 2025(13)                    
Fiscal year 2022 (as of February 28, 2022)   
-
    
-
    
-
     N/A  
Fiscal year 2021 (as of February 28, 2021)  $60,000   $3,471    
-
   $24.24(11)
Fiscal year 2020 (as of February 29, 2020)  $60,000   $6,071    
-
   $25.75(11)
Fiscal year 2019 (as of February 28, 2019)  $60,000   $2,345    
-
   $24.97(11)
7.00% Notes due 2025                    
Fiscal year 2023 (as of February 28, 2023)  $12,000   $1,659    
-
   $25.00(12)
7.25% Notes due 2025(16)                    
Fiscal year 2023 (as of February 28, 2023)   
-
    
-
    
-
     N/A  
Fiscal year 2022 (as of February 28, 2022)  $43,125   $2,093    
-
   $25.46(11)
Fiscal year 2021 (as of February 28, 2021)  $43,125   $3,471    
-
   $25.77(11)
7.75% Notes due 2025                    
Fiscal year 2023 (as of February 28, 2023)  $5,000   $1,659    
-
   $25.00(12)
Fiscal year 2022 (as of February 28, 2022)  $5,000   $2,093    
-
   $25.00(12)
Fiscal year 2021 (as of February 28, 2021)  $5,000   $3,471    
-
   $25.00(12)
4.375% Notes due 2026                    
Fiscal year 2023 (as of February 28, 2023)  $175,000   $1,659    
-
   $25.00(12)
Fiscal year 2022 (as of February 28, 2022)  $175,000   $2,093    
-
   $25.00(12)
4.35% Notes due 2027                    
Fiscal year 2023 (as of February 28, 2023)  $75,000   $1,659    
-
   $25.00(12)
Fiscal year 2022 (as of February 28, 2022)  $75,000   $2,093    
-
   $25.00(12)
6.25% Notes due 2027                    
Fiscal year 2023 (as of February 28, 2023)  $15,000   $1,659    
-
   $25.00(12)
Fiscal year 2022 (as of February 28, 2022)  $15,000   $2,093    
-
   $25.00(12)
Fiscal year 2021 (as of February 28, 2021)  $15,000   $3,471    
-
   $25.00(12)
6.00% Notes due 2027                    
Fiscal year 2023 (as of February 28, 2023)  $105,500   $1,659    
-
   $23.97(15)
8.00% Notes due 2027                    
Fiscal year 2023 (as of February 28, 2023)  $46,000   $1,659    
-
   $25.08(15)
8.125% Notes due 2027                    
Fiscal year 2023 (as of February 28, 2023)  $60,375   $1,659    
-
   $25.10(15)

 

 

(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 150% asset coverage ratio we are required to maintain under the 1940 Act.

 

F-61

 

 

(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.
   
(13) On August 31, 2021, the Company redeemed $60.0 million in aggregate principal amount of the issued and outstanding 6.25% 2025 Notes. The Company used a portion of the net proceeds from the 4.375% 2026 Notes offering, which was completed in July 2021, to redeem the 6.25% 2025 Notes in full.
   
(14) On October 4, 2021, the Company repaid all remaining amounts outstanding under the Madison Credit Facility and the credit agreement relating to the Madison Credit Facility was terminated.
   
(15) Based on the average daily trading price of the 2027 Notes on the NYSE.
   
(16) On July 14, 2022, the Company redeemed $43.1 million in aggregate principal amount of the issued and outstanding 7.25% 2025 Notes.

 

Note 9. Commitments and Contingencies

 

Contractual Obligations

 

The following table shows our payment obligations for repayment of debt and other contractual obligations at February 28, 2023:

 

       Payment Due by Period 
Long-Term Debt Obligations  Total   Less Than
1 Year
   1 - 3
Years
   3 - 5
Years
   More Than
5 Years
 
   ($ in thousands) 
Encina credit facility  $32,500   $      -   $32,500   $
-
   $
-
 
SBA debentures   202,000    -    15,000    12,000    175,000 
6.00% 2025 Notes   12,000    -    12,000    
-
    - 
7.75% 2025 Notes   5,000    -    5,000    
-
    
-
 
4.375% 2026 Notes   175,000    -    
-
    175,000    
-
 
4.35% 2027 Notes   75,000    -    
-
    75,000    
-
 
6.00% 2027 Notes   105,500    -    
-
    105,500    
-
 
6.25% 2027 Notes   15,000    -    
-
    15,000    
-
 
8.00% 2027 Notes   46,000    -    
-
    46,000    
-
 
8.125% 2027 Notes   60,375    -    
-
    60,375    
-
 
Total Long-Term Debt Obligations  $728,375   $-   $64,500   $488,875   $175,000 

 

F-62

 

 

Off-balance Sheet Arrangements

 

At February 28, 2023 and February 28, 2022, the Company’s off-balance sheet arrangements consisted of $108.8 million and $83.4 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 February 28, 2023 and February 28, 2022 is shown in the table below (dollars in thousands):

 

   February 28, 2023   February 28, 2022 
At Company’s discretion        
ActiveProspect, Inc.  $10,000   $
-
 
Artemis Wax Corp.   
-
    3,700 
Ascend Software, LLC   5,000    5,000 
Axero Holdings, LLC   
-
    3,000 
Book4Time, Inc.   
-
    2,000 
Davisware, LLC   
-
    2,000 
Granite Comfort, LP   15,000    
-
 
JDXpert   5,000    
-
 
LFR Chicken LLC   4,000    10,000 
Netreo Holdings, LLC   
-
    4,000 
Pepper Palace, Inc.   3,000    3,000 
Procurement Partners, LLC   4,250    2,800 
Saratoga Senior Loan Fund I JV, LLC   8,548    17,500 
Sceptre Hospitality Resources, LLC   5,000    1,000 
Total   59,798    54,000 
           
At portfolio company’s discretion - satisfaction of certain financial and nonfinancial covenants required          
ARC Health OpCo LLC   10,773    
-
 
Artemis Wax Corp.   8,500      
Ascend Software, LLC   3,200    6,500 
Axero Holdings, LLC   
-
    2,000 
Axero Holdings, LLC - Revolver   500    500 
Davisware, LLC   
-
    1,000 
Exigo, LLC   4,167    
 
 
Exigo, LLC - Revolver   833    
 
 
GDS Software Holdings, LLC   
-
    2,786 
Gen4 Dental Partners Holdings, LLC   11,000    
-
 
GoReact   2,500    2,500 
HemaTerra Holding Company, LLC   
-
    
-
 
JDXpert   1,000    
-
 
LFR Chicken LLC   
-
    3,000 
Madison Logic, Inc. - Revolver   
-
    1,084 
New England Dental Partners   
-
    4,500 
Passageways, Inc.   
-
    
-
 
Pepper Palace, Inc.   2,000    2,000 
Pepper Palace, Inc. - Revolver   2,500    2,500 
Procurement Partners, LLC   1,000    
-
 
Zollege PBC   1,000    1,000 
    48,973    29,370 
Total  $108,771   $83,370 

 

The Company believes its assets will provide adequate coverage to satisfy these unfunded commitments. As of February 28, 2023, the Company had cash and cash equivalents of $65.7 million and $31.1 million in available borrowings under the Encina Credit Facility.

 

Note 10. Directors Fees

 

The independent directors each receive an annual fee of $70,000. They also receive $3,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $1,500 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 $12,500 and the chairman of each other committee receives an annual fee of $6,000 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 NAV or the market price at the time of payment. No compensation is paid to directors who are “interested persons” of the Company (as defined in Section 2(a)(19) of the 1940 Act). For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, we incurred $0.4 million, $0.3 million and $0.3 million for directors’ fees and expenses, respectively. As of February 28, 2023 and February 28, 2022, $0.01 million and $0.07 million in directors’ fees and expenses were accrued and unpaid, respectively. As of February 28, 2023, we had not issued any common stock to our directors as compensation for their services.

 

F-63

 

 

Note 11. 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.

 

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 (the “Share Repurchase Plan”). On October 7, 2015, our board of directors extended the 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, our board of directors extended the 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, our board of directors extended the 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, our board of directors increased the Share Repurchase Plan to 1.3 million shares of common stock. On January 5, 2021 and January 4, 2022, our board of directors extended the Shares Repurchase Plan for another year to January 15, 2022 and January 15, 2023, respectively, each time leaving the number of shares unchanged at 1.3 million shares of common stock. On January 9, 2023, our board of directors extended the Share Repurchase Plan for another year to January 15, 2024, increasing the number of shares to 1.7 million shares of common stock. As of February 28, 2023, the Company purchased 946,627 shares of common stock, at the average price of $21.83 for approximately $20.7 million pursuant to the Share Repurchase Plan. During the three months ended February 28, 2023 the Company purchased 48,594 shares of common stock, at the average price $25.19 for approximately $1.2 million pursuant to the Share Repurchase Plan. During the year ended February 28, 2023, the Company purchased 438,192 shares of common stock, at the average price $24.70 for approximately $10.8 million pursuant to the Share 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. This agreement was terminated as of July 29, 2021. As of February 28, 2021, 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). For the year ended February 28, 2021, there was no activity related to the ATM offerings.

 

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. 

 

F-64

 

 

On July 30, 2021, we entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc. and Compass Point Research and Trading, LLC (collectively the “Agents”), through which we may offer for sale, from time to time, up to $150.0 million of our common stock through the Agents, or to them, as principal for their account. As of February 28, 2023, the Company sold 4,840,361 shares for gross proceeds of $123.9 million at an average price of $25.61 for aggregate net proceeds of $122.4 million (net of transaction costs). For the year ended February 28, 2023, there was no activity related to the ATM offerings.

 

The Company adopted Rule 3-04/Rule 8-03(a)(5) under Regulation S-X (Note 2).  Pursuant to Regulation S-X, the Company has presented a reconciliation of the changes in each significant caption of stockholders’ equity as shown in the tables below:

 

           Capital   Total
Distributable
     
   Common Stock   in Excess   Earnings     
   Shares   Amount   of Par Value   (Loss)   Net Assets 
Balance at February 28, 2021   11,161,416   $11,161   $304,874,957   $(700,348)  $304,185,770 
Increase (Decrease) from Operations:                         
Net investment income   -    
-
    
-
    2,555,935    2,555,935 
Net realized gain (loss) from investments   -    
-
    
-
    1,910,141    1,910,141 
Net change in unrealized appreciation (depreciation) on investments   -    
-
    
-
    16,812,577    16,812,577 
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   -    
-
    
-
    (230,144)   (230,144)
Decrease from Shareholder Distributions:                         
Distributions of investment income – net   -    
-
    
-
    (4,799,405)   (4,799,405)
Capital Share Transactions:                         
Proceeds from issuance of common stock   -    
-
    
-
    
-
    
-
 
Stock dividend distribution   38,580    39    914,063    
-
    914,102 
Repurchases of common stock   (40,000)   (40)   (1,003,380)   
-
    (1,003,420)
Repurchase fees   -    
-
    (800)   
-
    (800)
Offering costs   -    
-
    
-
    
-
    
-
 
Balance at May 31, 2021   11,159,995   $11,160   $304,784,840   $15,548,756   $320,344,756 
Increase (Decrease) from Operations:                         
Net investment income   -    
-
    
-
    6,393,261    6,393,261 
Net realized gain (loss) from investments   -    
-
    
-
    1,501,597    1,501,597 
Income tax (provision) benefit from realized gain on investments   -    
-
    
-
    (448,883)   (448,883)
Realized losses on extinguishment of debt                  (1,552,140)   (1,552,140)
Net change in unrealized appreciation (depreciation) on investments   -    
-
    
-
    3,376,540    3,376,540 
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   -    
-
    
-
    (1,328,711)   (1,328,711)
Decrease from Shareholder Distributions:                         
Distributions of investment income – net   -    
-
    
-
    (4,910,394)   (4,910,394)
Capital Share Transactions:                         
Proceeds from issuance of common stock   5,441    6    157,034    
-
    157,040 
Stock dividend distribution   33,099    33    828,479    
-
    828,512 
Repurchases of common stock   (9,623)   (10)   (248,713)   
-
    (248,723)
Repurchase fees   -    
-
    (192)   
-
    (192)
Offering costs   -    
-
    (817)   
-
    (817)
Balance at August 31, 2021   11,188,912   $11,189   $305,520,631   $18,580,025   $324,111,845 

 

F-65

 

 

           Capital in   Total
Distributable
     
   Common Stock   Excess of   Earnings     
   Shares   Amount   Par Value   (Loss)   Net Assets 
Increase (Decrease) from Operations:                    
Net investment income   -    
-
    
-
    5,196,635    5,196,635 
Net realized gain (loss) from investments   -    
-
    
-
    9,916,925    9,916,925 
Income tax (provision) benefit from realized gain on investments   -    
-
    
-
    (2,447,173)   (2,447,173)
Realized losses on extinguishment of debt                  (764,123)   (764,123)
Net change in unrealized appreciation (depreciation) on investments   -    
-
    
-
    (6,042,616)   (6,042,616)
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   -    
-
    
-
    2,480,465    2,480,465 
Decrease from Shareholder Distributions:                         
Distributions of investment income – net   -    
-
    
-
    (5,889,329)   (5,889,329)
Capital Share Transactions:                         
Proceeds from issuance of common stock   520,076    520    15,163,259    
-
    15,163,779 
Stock dividend distribution   38,016    38    1,017,625    
-
    1,017,663 
Repurchases of common stock   -    
-
    
-
    
-
    
-
 
Repurchase fees   -    
-
    
-
    
-
    
-
 
Offering costs   -    
-
    (142,326)   
-
    (142,326)
Balance at November 30, 2021   11,747,004   $11,747   $321,559,189   $21,030,809   $342,601,745 
Increase (Decrease) from Operations:                         
Net investment income   -    
-
    
-
    5,796,910    5,796,910 
Net realized gain (loss) from investments   -    
-
    
-
    69,664    69,664 
Income tax (provision) benefit from realized gain on investments   -    
-
    
-
    9,612    9,612 
Realized losses on extinguishment of debt                  (118,147)   (118,147)
Net change in unrealized appreciation (depreciation) on investments   -    
-
    
-
    2,873,561    2,873,561 
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   -    
-
    
-
    (226,702)   (226,702)
Decrease from Shareholder Distributions:                         
Distributions of investment income – net   -    
-
    
-
    (6,434,106)   (6,434,106)
Capital Share Transactions:                         
Proceeds from issuance of common stock   392,826    392    11,513,992    
-
    11,514,383 
Stock dividend distribution   41,520    42    1,114,886    
-
    1,114,929 
Repurchases of common stock   (50,000)   (50)   (1,292,843)   
-
    (1,292,893)
Repurchase fees             (1,000)   
-
    (1,000)
Offering costs   -    -    (127,433)   
-
    (127,433)
Tax reclassification of stockholders’ equity in accordance with generally accepted accounting principles   -    
-
    (4,704,545)   4,704,545    
-
 
Balance at February 28, 2022   12,131,350   $12,131   $328,062,246   $27,706,146   $355,780,523 
Increase (Decrease) from Operations:                         
Net investment income   -    
-
    
-
    7,976,222    7,976,222 
Net realized gain (loss) from investments   -    
-
    
-
    162,509    162,509 
Income tax (provision) benefit from realized gain on investments   -    
-
    
-
    69,250    69,250 
Net change in unrealized appreciation (depreciation) on investments   -    
-
    
-
    (9,333,449)   (9,333,449)
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   -    
-
    
-
    (361,951)   (361,951)
Decrease from Shareholder Distributions:                         
Distributions of investment income – net   -    
-
    
-
    (6,428,817)   (6,428,817)
Capital Share Transactions:                         
Stock dividend distribution   42,825    43    1,108,637    
-
    1,108,680 
Repurchases of common stock   (142,177)   (142)   (3,734,174)   
-
    (3,734,316)
Repurchase fees   -    
-
    (2,840)   
-
    (2,840)
Balance at May 31, 2022   12,031,998   $12,032   $325,433,869   $19,789,910   $345,235,811 

 

F-66

 

 

           Capital in   Total
Distributable
     
   Common Stock   Excess of   Earnings     
   Shares   Amount   Par Value   (Loss)   Net Assets 
Increase (Decrease) from Operations:                    
Net investment income   -    -    -    7,698,014    7,698,014 
Net realized gain (loss) from investments   -    -    -    7,943,838    7,943,838 
Realized losses on extinguishment of debt   -    -    -    (1,204,809)   (1,204,809)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (13,258,456)   (13,258,456)
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   -    -    -    (230,154)   (230,154)
Decrease from Shareholder Distributions:                         
Distributions of investment income – net   -    -    -    (6,369,981)   (6,369,981)
Capital Share Transactions:                         
Stock dividend distribution   48,590    49    1,088,139    
-
    1,088,188 
Repurchases of common stock   (153,350)   (154)   (3,685,951)   
-
    (3,686,105)
Repurchase fees   -    -    (3,071)   -    (3,071)
Balance at August 31, 2022   11,927,238   $11,927   $322,832,986   $14,368,362   $337,213,275 
                          
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    9,877,437    9,877,437 
Net realized gain (loss) from investments   -    -    -    (740,434)   (740,434)
Income tax (provision) benefit from realized gain on investments   -    -    -    479,318    479,318 
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (3,176,208)   (3,176,208)
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   -    -    -    (425,848)   (425,848)
Decrease from Shareholder Distributions:                         
Distributions of investment income – net   -    -    -    (6,433,298)   (6,433,298)
Capital Share Transactions:                         
Stock dividend distribution   52,312    53    1,150,881    -    1,150,934 
Repurchases of common stock   (94,071)   (95)   (2,179,600)   -    (2,179,695)
Repurchase fees   -    -    (1,881)   -    (1,881)
Balance at November 30, 2022   11,885,479   $11,885   $321,802,386   $13,949,329   $335,763,600 
                          
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    9,649,474    9,649,474 
Net realized gain (loss) from investments   -    -    -    80,683    80,683 
Realized losses on extinguishment of debt   -    -    -    (382,274)   (382,274)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    10,549,981    10,549,981 
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   -    -    -    (697,380)   (697,380)
Decrease from Shareholder Distributions:                         
Distributions of investment income – net   -    -    -    (8,081,306)   (8,081,306)
Capital Share Transactions:                         
Stock dividend distribution   53,615    55    1,300,405    -    1,300,460 
Repurchases of common stock   (48,594)   (49)   (1,224,175)   -    (1,224,224)
Repurchase fees   -    -    (972)   -    (972)
Tax reclassification of stockholders’ equity in accordance with generally accepted accounting principles   -    -    16,162    (16,162)   - 
Balance at February 28, 2023   11,890,500   $11,891   $321,893,806   $25,052,345   $346,958,042 

 

F-67

 

 

Note 12. 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 years ended February 28, 2023, February 28, 2022 and February 28, 2021 (dollars in thousands except share and per share amounts):

 

Basic and Diluted  February 28, 2023   February 28, 2022   February 28, 2021 
Net increase in net assets resulting from operations  $24,676   $45,735   $14,777 
Weighted average common shares outstanding   11,963,533    11,456,631    11,188,629 
Weighted average earnings per common share  $2.06   $3.99   $1.32 

 

Note 13. Dividend

 

We have distributed or intend to distribute sufficient dividends to eliminate taxable income for our completed tax years. If we fail to satisfy the 90% distribution requirement or otherwise fail to qualify as a RIC in any tax year, we would be subject to tax in that year on all of our taxable income, regardless of whether we made any distributions to our shareholders. Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock. Our distributions for the tax years ended February 28, 2023 to inception were as follows:

 

Payment date  Cash Dividend 
Tax Year Ended February 28, 2024    
March 30, 2023  $0.69(1)
   $0.69 
Tax Year Ended February 28, 2023     
January 4, 2023  $0.68(2)
September 29, 2022   0.54(3)
June 29, 2022   0.53(4)
March 28, 2022   0.53(5)
   $2.28 
Tax Year Ended February 28, 2022     
January 19, 2022  $0.53(6)
September 28, 2021   0.52(7)
June 29, 2021   0.44(8)
April 22, 2021   0.43(9)
   $1.92 
Tax Year Ended February 28, 2021     
February 10, 2021  $0.42(10)
November 10, 2020   0.41(11)
August 12, 2020   0.40(12)
   $1.03 
Tax Year Ended February 29, 2020     
February 6, 2020  $0.56(13)
September 26, 2019   0.56(14)
June 27, 2019   0.55(15)
March 28, 2019   0.54(16)
   $2.21 
Tax Year Ended February 28, 2019     
January 2, 2019  $0.53(17)
September 27, 2018   0.52(18)
June 27, 2018   0.51(19)
March 26, 2018   0.50(20)
   $2.06 
Tax Year Ended February 28, 2018     
December 27, 2017  $0.49(21)
September 26, 2017   0.48(22)
June 27, 2017   0.47(23)
March 28, 2017   0.46(24)
   $1.90 

 

F-68

 

 

Payment date  Cash Dividend 
Tax Year Ended February 28, 2017     
February 9, 2017  $0.45(25)
November 9, 2016   0.44(26)
September 5, 2016   0.20(27)
August 9, 2016   0.43(28)
April 27, 2016   0.41(29)
   $1.93 
      
Tax Year Ended February 29, 2016     
February 29, 2016  $0.40(30)
November 30, 2015   0.36(31)
August 31, 2015   0.33(32)
June 5, 2015   1.00(33)
May 29. 2015   0.27(34)
   $2.36 
Tax Year Ended February 28, 2015     
February 27, 2015  $0.22(35)
November 28, 2014   0.18(36)
   $0.40 
Tax Year Ended February 28. 2014     
December 27, 2013  $2.65(37)
   $2.65 
Tax Year Ended February 28, 2013     
December 31, 2012  $4.25(38)
   $4.25 
Tax Year Ended February 29, 2012     
December 30, 2011  $3.00(39)
   $3.00 
Tax Year Ended February 28, 2011     
December 29, 2010  $4.40(40)
   $4.40 
Tax Year Ended February 28, 2010     
December 31, 2009  $18.25(41)
   $18.25 

 

(1) Based on shareholder elections, the dividend consisted of approximately $7.1 million in cash and 46,818 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 $23.11 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on March 17, 20, 21, 22, 23, 24, 27, 28, 29, and 30, 2023.
   
(2) Based on shareholder elections, the dividend consisted of approximately $6.8 million in cash and 53,615 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 $24.26 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on December 20, 21, 22, 23, 27, 28, 29 and 30 2022 and January 3 and 4, 2023.
   
(3) Based on shareholder elections, the dividend consisted of approximately $5.3 million in cash and 52,313 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 $22.00 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on September 16, 19, 20, 21, 22, 23, 26, 27, 28 and 29, 2022.
   
(4) Based on shareholder elections, the dividend consisted of approximately $5.1 million in cash and 48,590 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 $22.40 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on June 15, 16, 17, 21, 22, 23, 24, 27, 28 and 29, 2022.
   
(5) Based on shareholder elections, the dividend consisted of approximately $5.3 million in cash and 42,825 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 $25.89 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on March 15, 16, 17, 18, 21, 22, 23, 24, 25 and 28, 2022.

 

F-69

 

 

(6) Based on shareholder elections, the dividend consisted of approximately $5.3 million in cash and 41,520 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 $26.85 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on January 5, 6, 7, 10, 11, 12, 13, 14, 18 and 19, 2022.
   
(7) Based on shareholder elections, the dividend consisted of approximately $4.9 million in cash and 38,016 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 $26.77 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on September 15, 16, 17, 20, 21, 22, 23, 24, 27 and 28, 2021.
   
(8) Based on shareholder elections, the dividend consisted of approximately $4.1 million in cash and 33,100 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 $25.03 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on June 16, 17, 18, 21, 22, 23, 24, 25, 28 and 29, 2021.
   
(9) Based on shareholder elections, the dividend consisted of approximately $3.9 million in cash and 38,580 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 $23.69 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on April 9,12, 13, 14, 15, 16, 19, 20, 21 and 22, 2021.
   
(10) Based on shareholder elections, the dividend consisted of approximately $3.8 million in cash and 41,388 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 $21.75 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on January 28, 29 and February 1, 2, 3, 4, 5, 8, 9 and 10, 2021.
   
(11) Based on shareholder elections, the dividend consisted of approximately $3.8 million in cash and 45,706 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 $17.63 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on October 28, 29, 30 and November 2, 3, 4, 5, 6, 9 and 10, 2020.
   
(12) 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 95.0% 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.

 

F-70

 

 

(13) 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.
   
(14) 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.
   
(15) 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 95.0% 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.
   
(16) 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 95.0% 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.
   
(17) 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.
   
(18) 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.
   
(19) 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% 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.
   
(20) 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 95.0% 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.
   
(21) 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 95.0% 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.
   
(22) 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 95.0% 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.
   
(23) 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 95.0% 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.

 

F-71

 

 

(24) 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 95.0% 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.
   
(25) 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 95.0% 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.
   
(26) Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,548 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 $17.12 per share, which equaled 95.0% 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.
   
(27) 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 95.0% 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.
   
(28) 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 95.0% 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.
   
(29) 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 95.0% 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.
   
(30) 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 95.0% 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.
   
(31) 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 95.0% 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.
   
(32) 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 95.0% 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.
   
(33) 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 95.0% 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.
   
(34) 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 95.0% 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.

 

F-72

 

 

(35) 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 95.0% 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.
   
(36) 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 95.0% 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.
   
(37) 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 equaled the volume weighted average trading price per share of the common stock on December 11, 13 and 16, 2013.
   
(38) 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 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 the volume weighted average trading price per share of the common stock on December 14, 17 and 19, 2012.
   
(39) 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 the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2011.
   
(40) 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 the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2010.
   
(41) 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 the volume weighted average trading price per share of the common stock on December 24 and 28, 2009.

 

F-73

 

 

The following tables summarize dividends declared for the years ended February 28, 2023, February 28, 2022, February 28, 2021, February 29, 2020 and February 28, 2019 (dollars in thousands except for share amounts):

 

Date Declared  Record Date  Payment Date  Amount per Share   Total Amount* 
February 28, 2023  March 16, 2023  March 30, 2023  $0.69   $8,193 
November 15, 2022  December 15, 2022  January 4, 2023   0.68    8,081 
August 29, 2022  September 14, 2022  September 29, 2022   0.54    6,433 
May 26, 2022  June 14, 2022  June 29, 2022   0.53    6,370 
Total dividends declared        $2.44   $29,077 
                 

 

Date Declared  Record Date  Payment Date  Amount per Share   Total Amount* 
February 24, 2022  March 14, 2022  March 28, 2022  $0.53   $6,434 
August 26, 2021  September 14, 2021  September 28, 2021   0.52    5,889 
May 27, 2021  June 15, 2021  June 29, 2021   0.44    4,910 
March 22, 2021  April 8, 2021  April 22, 2021   0.43    4,799 
Total dividends declared        $1.92   $22,032 

 

Date Declared  Record Date  Payment Date  Amount per Share   Total Amount* 
January 5, 2021  January 26, 2021  February 10, 2021  $0.42   $4,679 
October 7, 2020  October 26, 2020  November 10, 2020   0.41    4,581 
July 7, 2020  July 27, 2020  August 12, 2020   0.40    4,487 
Total dividends declared        $1.23   $13,747 

 

Date Declared  Record Date  Payment Date  Amount per Share   Total Amount* 
January 7, 2020  January 24, 2020  February 6, 2020  $0.56   $6,262 
August 27, 2019  September 13, 2019  September 26, 2019   0.56    5,323 
May 28, 2019  June 13, 2019  June 27, 2019   0.55    4,336 
February 26, 2019  March 14, 2019  March 28, 2019   0.54    4,176 
Total dividends declared        $2.21   $20,097 

 

Date Declared  Record Date  Payment Date  Amount per Share   Total Amount* 
November 27, 2018  December 17, 2018  January 2, 2019  $0.53   $3,980 
August 28, 2018  September 17, 2018  September 27, 2018   0.52    3,876 
May 30, 2018  June 15, 2018  June 27, 2018   0.51    3,204 
February 26, 2018  March 14, 2018  March 26, 2018   0.50    3,129 
Total dividends declared        $2.06   $14,189 

 

 

*Total amount is calculated based on the number of shares outstanding at the date of record.

 

F-74

 

 

Note 14. Financial Highlights

 

The following is a schedule of financial highlights as of and for the years ended February 28, 2023, February 28, 2022, February 28, 2021, February 29, 2020 and February 28, 2019:         

 

Per share data  February 28, 2023   February 28, 2022   February 28, 2021   February 29, 2020   February 28, 2019 
Net asset value at beginning of period  $29.33   $27.25   $27.13   $23.62   $22.96 
Adoption of ASC 606   
-
    
-
    
-
    -    (0.01)
Net asset value at beginning of period, as adjusted   29.33    27.25    27.13    23.62    22.95 
Net investment income(1)   2.94    1.74    2.07    1.59    2.60 
Net realized and unrealized gain and losses on investments(1)   (0.75)   2.46    (0.74)   4.56    0.03 
Realized losses on extinguishment of debt*   (0.13)   (0.21)   (0.01)   (0.17)   
-
 
Net increase in net assets resulting from operations   2.06    3.99    1.32    5.98    2.63 
Distributions declared from net investment income   (2.28)   (1.93)   (1.23)   (2.21)   (2.06)
Total distributions to stockholders   (2.28)   (1.93)   (1.23)   (2.21)   (2.06)
Issuance of common stock above net asset value(2)   
-
    
-
    
-
    
-
    0.15 
Repurchases of common stock(3)   0.17    0.01    0.13    
-
    
-
 
Dilution(4)   (0.10)   
-
    (0.10)   (0.26)   (0.05)
Net asset value at end of period  $29.18   $29.33   $27.25   $27.13   $23.62 
Net assets at end of period  $346,958,042   $355,780,523   $304,185,770   $304,286,853   $180,875,187 
Shares outstanding at end of period   11,890,500    12,131,350    11,161,416    11,217,545    7,657,156 
Per share market value at end of period  $27.55   $27.47   $23.08   $22.91   $23.04 
Total return based on market value(5)   10.35%   28.19%   7.63%   9.28%   16.11%
Total return based on net asset value(6)   9.46%   15.88%   7.31%   26.22%   13.33%
Ratio/Supplemental data:                         
Ratio of net investment income to average net assets   10.23%   6.05%   7.77%   6.31%   11.22%
Ratio of loss on extinguishment of debt to average net assets   0.46%   0.74%   0.04%   0.67%   
-
 
Expenses:                         
Ratios of operating expenses and income taxes to average net assets*   7.71%   6.48%   6.90%   6.10%   8.07%
Ratio of incentive management fees to average net assets   1.47%   3.58%   1.65%   6.01%   3.00%
Ratio of interest and debt financing expenses to average net assets   9.73%   6.03%   4.56%   6.23%   8.05%
Ratio of total expenses and income taxes to average net assets*   18.91%   16.09%   13.11%   18.34%   19.12%
Portfolio turnover rate(7)   24.05%   33.59%   25.26%   36.82%   35.26%
Asset coverage ratio per unit(8)   1,659    2,092    3,471    6,071    2,345 
Average market value per unit                         
Revolving Credit Facility(9)   N/A    N/A    N/A    N/A    N/A 
SBA Debentures Payable(9)   N/A    N/A    N/A    N/A    N/A 
6.75% Notes Payable 2023(10)   N/A    N/A    N/A     N/A    $25.74 
6.25% Notes Payable 2025(11)    N/A      N/A    $24.24   $25.75    24.97 
7.00% Notes Payable 2025(9)    N/A      N/A      N/A      N/A      N/A  
7.25% Notes Payable 2025(12)    N/A    $26.18    25.77    N/A    N/A 
7.75% Notes Payable 2025(9)    N/A      N/A     N/A    N/A    N/A 
4.375% Notes Payable(9)    N/A      N/A     N/A    N/A    N/A 
4.35% Notes Payable(9)    N/A      N/A     N/A    N/A    N/A 
6.25% Notes Payable 2027(9)    N/A      N/A     N/A    N/A    N/A 
6.00% Notes Payable 2027  $23.97     N/A     N/A    N/A    N/A 
8.00% Notes Payable 2027  $25.08     N/A     N/A    N/A    N/A 
8.125% Notes Payable 2027  $25.10     N/A     N/A    N/A    N/A 

 

 

*Certain prior period amounts have been reclassified to conform to current period presentation.
  

(1) Per share amounts are calculated using the weighted average shares outstanding during the period.

 

F-75

 

 

(2) The continuous issuance of common stock may cause an incremental increase in NAV 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 NAV 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 NAV 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 NAV per share of the Company due to the repurchase of common shares.  

 

(4) Represents the dilutive effect of issuing common stock below NAV 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 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 13, Dividend.

 

(5) 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 DRIP. Total investment return does not reflect brokerage commissions.

 

(6) Total investment return is calculated assuming a purchase of common shares at the current NAV on the first day and a sale at the current NAV 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 DRIP. Total investment return does not reflect brokerage commissions.

 

(7) 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.

 

(8) 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.

 

(9) The Revolving Credit Facility, SBA Debentures, 7.00% Notes Payable 2025, 4.375% Notes Payable 2026, 4.35% Notes Payable 2026, 7.75% Notes Payable 2025 and 6.25% Notes Payable 2027 are not registered for public trading.

 

(10) 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.

 

(11) On August 31, 2021, the Company redeemed $60.0 million in aggregate principal amount of the issued and outstanding 6.25% 2025 Notes and, as a result of the full redemption, the 6.25% 2025 Notes are no longer listed on the NYSE.
   

 

(12) On July 14, 2022, the Company redeemed $43.1 million in aggregate principal amount of the $43.1 million in aggregate principal amount of issued and outstanding 7.25% 2025 Notes and are no longer listed on the NYSE.

 

F-76

 

 

Note 15. Selected Quarterly Data (Unaudited)

 

   2023 
($ in thousands, except per share numbers)  Qtr 4   Qtr 3   Qtr 2   Qtr 1 
Total investment income  $32,315   $26,257   $21,853   $18,679 
Net investment income   9,650    9,877    7,698    7,976 
Net realized and unrealized gain (loss)   9,934    (3,863)   (5,545)   (9,464)
Realized losses on extinguishment of debt*   (382)   
-
    (1,205)   
-
 
Net increase in net assets resulting from operations   19,202    6,014    948    (1,488)
Net investment income per common share  $0.81   $0.83   $0.64   $0.66 
Net realized and unrealized gain (loss) per common share  $0.81   $(0.32)  $(0.46)  $(0.78)
Dividends declared per common share  $0.68   $0.54   $0.53   $0.53 
Net asset value per common share  $29.18   $28.25   $28.27   $28.69 

 

   2022 
($ in thousands, except per share numbers)  Qtr 4   Qtr 3   Qtr 2   Qtr 1 
Total investment income  $18,980   $16,502   $18,442   $16,816 
Net investment income   5,796    5,197    6,393    2,556 
Net realized and unrealized gain (loss)   2,725    3,908    3,101    18,493 
Realized losses on extinguishment of debt*   (2,434)   (118)   (1,552)   
-
 
Net increase in net assets resulting from operations   8,404    8,340    7,942    21,049 
Net investment income per common share  $0.48   $0.45   $0.57   $0.23 
Net realized and unrealized gain (loss) per common share  $0.23   $0.34   $0.29   $1.66 
Dividends declared per common share  $0.53   $0.52   $0.44   $0.43 
Net asset value per common share  $29.33   $29.17   $28.97   $28.70 

 

   2021 
($ in thousands, except per share numbers)  Qtr 4   Qtr 3   Qtr 2   Qtr 1 
Total investment income  $16,214   $14,283   $13,856   $13,297 
Net investment income   4,289    4,471    5,335    9,018 
Net realized and unrealized gain (loss)   5,096    1,895    16,476    (31,674)
Realized losses on extinguishment of debt*   (129)   
-
    
-
    
-
 
Net increase in net assets resulting from operations   9,257    6,366    21,811    (22,656)
Net investment income per common share  $0.38   $0.40   $0.48   $0.80 
Net realized and unrealized gain (loss) per common share  $0.46   $0.17   $1.48   $(2.82)
Dividends declared per common share  $0.42   $0.41   $0.40   $- 
Net asset value per common share  $27.25   $26.84   $26.68   $25.11 

 

*Certain prior period amounts have been reclassified to conform to current period presentation.

 

Note 16. Subsequent Events

 

The Company has evaluated subsequent events through the filing of this Form 10-K 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 March 31, 2023 and May 1, 2023, we issued $10.0 million and $10.0 million, respectively, in aggregate principal amount of our 8.75% 2024 Notes for net proceeds in each issuance of approximately $9.6 million after deducting customary fees of 3.50% and offering expenses of approximately $0.1 million. Interest on the 8.75% 2024 Notes will be paid quarterly in arrears on February 28, May 31, August 31 and November 30, beginning on May 31, 2023, at a rate of 8.75% per year. The 8.75% 2024 Notes will mature on March 31, 2024, unless extended to March 31, 2025 at the sole discretion of the Company. The net proceeds from the offering were used make investments in middle-market companies in accordance with our investment objective and strategies (including investments made through SBIC III LP) and for general corporate purposes.

 

On April 14, 2023, we issued $50.0 million in aggregate principal amount of 8.50% fixed-rate notes due 2028 (the “8.50% 2028 Notes”) for net proceeds of $48.2 million, based on a public offering price of 100% of par, after deducting underwriting discounts and commissions of approximately $1.6 million and estimated offering expenses of approximately $0.2 million. On April 25, 2023, the underwriters exercised their option in full to purchase an additional $7.5 million in aggregate principal amount of its 8.50% notes due 2028 within 30 days. Net proceeds to the Company were $7.3 million after deducting underwriting commissions of approximately $0.2 million. The 8.50% 2028 Notes are listed on the NYSE under the trading symbol “SAZ” with a par value of $25.00 per share. Interest on the 8.50% 2028 Notes will be paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 8.50% per year, beginning May 31, 2023. The 8.50% 2028 Notes mature on April 15, 2028 and commencing April 14, 2025, may be redeemed in whole or in part at any time or from time to time at our option. We intend to use the net proceeds of the offering to repay a portion of outstanding indebtedness under the Encina Credit Facility, make investments in middle-market companies in accordance with our investment objective and strategies (including investments made through SBIC III LP) and for general corporate purposes.

 

F-77

 

 

INDEX TO OTHER FINANCIAL STATEMENTS

Saratoga Investment Corp. CLO 2013-1, Ltd.

 

  PAGE
Independent Auditor’s Report S-2
Statements of Assets and Liabilities as of February 28, 2023 and February 28, 2022 S-3
Statements of Operations for the years ended February 28, 2023, February 28, 2022 and February 28, 2021 S-4
Statements of Changes in Net Assets for the years ended February 28, 2023, February 28, 2022 and February 28, 2021 S-5
Statements of Cash Flows for the years ended February 28, 2023, February 28, 2021 and February 28, 2022 S-6
Schedules of Investments as of February 28, 2023 and February 28, 2022 S-7
Notes to Financial Statements S-55

 

IMPORTANT NOTE

 

In accordance with certain SEC rules, Saratoga Investment Corp. (the “Company”) is providing additional information regarding one of its portfolio companies, Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”). The Company owns 100% of the subordinated notes of the Saratoga CLO. The additional financial information regarding the Saratoga CLO does not directly impact the Company’s financial position, results of operations or cash flows.

 

S-1

 

 

Independent Auditor’s Report

 

[Saratoga CLO opinion 2-28-23 draft]

(CLO)

 

To the Board of Directors

Saratoga Investment Corp. CLO 2013-1, Ltd.

 

Opinion

 

We have audited the financial statements of Saratoga Investment Corp. CLO 2013-1, Ltd. (”Saratoga CLO”), which comprise the statements of assets and liabilities, including the schedules of investments, as of February 28, 2023 and 2022, and the related statements of operations, changes in net assets, and cash flows for the years ended February 28, 2023, 2022 and 2021, and the related notes to the financial statements.

 

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of Saratoga Investment Corp. CLO 2013-1, Ltd. as of February 28, 2023 and 2022, and the results of its operations, changes in its net assets, and its cash flows for the years ended February 28, 2023, 2022 and 2021 in accordance with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (“GAAS”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Saratoga CLO and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Responsibilities of Management for the Financial Statements

 

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Saratoga CLO’s ability to continue as a going concern for one year after the date that the financial statements are available to be issued.

 

Auditor’s Responsibilities for the Audit of the Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

 

In performing an audit in accordance with GAAS, we:

 

Exercise professional judgment and maintain professional skepticism throughout the audit.

 

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

 

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Saratoga CLO’s internal control. Accordingly, no such opinion is expressed.

 

Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.

 

Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Saratoga CLO’s ability to continue as a going concern for a reasonable period of time.

 

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

 

/s/ CohnReznick LLP

 

Chicago, Illinois

May 2, 2023

 

S-2

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd. 

Statements of Assets and Liabilities

 

   February 28, 2023   February 28, 2022 
ASSETS        
Investments at fair value        
Loans at fair value (amortized cost of $645,599,001 and $653,022,265, respectively)  $605,954,468   $638,929,660 
Equities at fair value  (amortized cost of $0 and $0, respectively)   -    33,690 
Total investments at fair value (amortized cost of $645,599,001 and $653,022,265, respectively)   605,954,468    638,963,350 
Cash and cash equivalents   23,776,950    6,171,793 
Receivable from open trades   1,827,460    9,152,660 
Interest receivable (net of reserve of $234,690 and $0, respectively)   3,026,720    2,062,856 
Due from affiliate (See Note 7)   119,150    - 
Prepaid expenses and other assets   152,760    100,067 
Total assets  $634,857,508   $656,450,726 
           
LIABILITIES          
Interest payable  $4,662,695   $1,659,776 
Payable from open trades   23,184,337    18,794,627 
Accrued base management fee   72,762    72,510 
Accrued subordinated management fee   291,047    290,040 
Accounts payable and accrued expenses   82,565    58,716 
Saratoga Investment Corp. CLO 2013-1, Ltd. Notes:          
Class A-1-R-3 Senior Secured Floating Rate Notes   357,500,000    357,500,000 
Class A-2-R-3 Senior Secured Floating Rate Notes   65,000,000    65,000,000 
Class B-FL-R-3 Senior Secured Floating Rate Notes   60,500,000    60,500,000 
Class B-FXD-R-3 Senior Secured Fixed Rate Notes   11,000,000    11,000,000 
Class C-FL-R-3 Deferrable Mezzanine Floating Rate Notes   26,000,000    26,000,000 
Class C-FXD-R-3 Deferrable Mezzanine Fixed Rate Notes   6,500,000    6,500,000 
Class D-R-3 Deferrable Mezzanine Floating Rate Notes   39,000,000    39,000,000 
Discount on Class D-R-3 Notes   (244,234)   (268,301)
Class E-R-3 Deferrable Mezzanine Floating Rate Notes   27,625,000    27,625,000 
Discount on Class E-R-3 Notes   (2,537,315)   (2,787,348)
Class F-1-R-3 Notes Deferrable Junior Floating Rate Notes   8,500,000    8,500,000 
Class F-2-R-3 Notes Deferrable Junior Floating Rate Notes   9,375,000    9,375,000 
Deferred debt financing costs   (1,897,076)   (2,086,928)
Subordinated Notes   111,000,000    111,000,000 
Discount on Subordinated Notes   (40,130,353)   (44,084,883)
Total liabilities  705,484,428   693,648,209 
NET ASSETS          
Ordinary equity, par value $1.00, 250 ordinary shares authorized, 250 and 250 common shares issued and outstanding, respectively  250   250 
Total distributable earnings (loss)   (70,627,170)   (37,197,733)
Total net deficit   (70,626,920)   (37,197,483)
Total liabilities and net assets  $634,857,508   $656,450,726 

 

See accompanying notes to financial statements.

 

S-3

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Operations

 

   For the years ended 
   February 28,
2023
   February 28,
2022
   February 28,
2021
 
INVESTMENT INCOME            
Interest from investments  $42,505,427   $30,767,008   $27,100,908 
Interest from cash and cash equivalents   39,754    691    3,835 
Other income   551,174    710,708    729,235 
Total investment income   43,096,355    31,478,407    27,833,978 
                
EXPENSES               
Interest and debt financing expenses   38,425,261    24,220,477    25,903,182 
Base management fee   653,964    652,517    501,526 
Subordinated management fee   2,615,856    2,610,073    2,006,101 
Professional fees   252,196    255,521    454,136 
Trustee expenses   276,689    262,632    213,212 
Other expense   303,371    243,511    55,702 
Total expenses   42,527,337    28,244,731    29,133,859 
NET INVESTMENT INCOME (LOSS)   569,018    3,233,676    (1,299,881)
                
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS               
Net realized loss from investments   (8,412,837)   (1,063,813)   (10,922,627)
Net change in unrealized appreciation (depreciation) on investments   (25,585,618)   (10,829,482)   21,775,577 
Net realized and unrealized gain (loss) on investments   (33,998,455)   (11,893,295)   10,852,950 
Realized losses on extinguishment of debt   -    -    (2,988,764)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $(33,429,437)  $(8,659,619)  $6,564,305 

 

See accompanying notes to financial statements.

 

S-4

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Changes in Net Assets

 

   For the years ended 
   February 28,
2023
   February 28,
2022
   February 28,
2021
 
INCREASE (DECREASE) FROM OPERATIONS:            
Net investment income (loss)  $569,018   $3,233,676   $(1,299,881)
Net realized gain (loss) from investments   (8,412,837)   (1,063,813)   (10,922,627)
Realized losses on extinguishment of debt   -    -    (2,988,764)
Net change in unrealized appreciation (depreciation) on investments   (25,585,618)   (10,829,482)   21,775,577 
Net increase (decrease) in net assets resulting from operations   (33,429,437)   (8,659,619)   6,564,305 
Total increase (decrease) in net assets   (33,429,437)   (8,659,619)   6,564,305 
Net assets at beginning of period   (37,197,483)   (28,537,864)   (35,102,169)
Net assets at end of period  $(70,626,920)  $(37,197,483)  $(28,537,864)

 

See accompanying notes to financial statements.

 

S-5

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Cash Flows

 

   For the years ended 
   February 28,
2023
   February 28,
2022
   February 28,
2021
 
Operating activities            
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $(33,429,437)  $(8,659,618)  $6,564,305 
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   (764,255)   (609,083)   261,032 
Net accretion of discount on investments   (2,470,677)   (3,151,234)   (2,346,642)
Amortization of discount and deferred debt financing costs   4,418,481    4,418,481    3,211,790 
Realized loss on extinguishment of debt   -    -    2,988,764 
Net realized (gain) loss from investments   8,412,837    1,063,812    10,922,627 
Net change in unrealized (appreciation) depreciation on investments   25,585,618    10,829,482    (21,775,577)
Proceeds from sales and repayments of investments   124,326,428    247,233,353    142,702,281 
Purchases of investments   (122,081,068)   (302,309,641)   (220,783,828)
(Increase) decrease in operating assets:               
Interest receivable, net   (963,864)   (565,523)   (202,810)
Receivable from open trades   7,325,200    (7,250,906)   8,517,946 
Due from affiliate   (119,150)   -    - 
Other assets   (52,693)   18,801    (34,342)
Increase (decrease) in operating liabilities:               
Interest and debt fees payable   3,002,919    1,535,543    (1,965,955)
Payable for open trades   4,389,710    (47,503,941)   29,625,097 
Accrued base management fee   252    65,580    (47,511)
Accrued subordinated management fee   1,007    262,325    (190,051)
Accounts payable and accrued expenses   23,849    (751,044)   727,938 
Due to affiliate   -    (2,600,000)   2,600,000 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   17,605,157    (107,973,613)   (39,224,936)
                
Financing activities               
Borrowings on debt   -    -    627,359,912 
Paydowns on debt   -    -    (475,100,000)
Deferred debt financing costs paid   -    -    (7,970,611)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   -    -    144,289,301 
                
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   17,605,157    (107,973,613)   105,064,365 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   6,171,793    114,145,406    9,081,041 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $23,776,950   $6,171,793   $114,145,406 
                
Supplemental Information:               
Interest paid during the period  $31,003,861   $18,266,452   $24,657,347 
                
Supplemental non-cash information:               
Paid-in-kind interest income and other adjustments to cost  $764,255   $609,083   $(261,032)
Net accretion of discount on investments   2,470,677    3,151,234    2,346,642 
Amortization of deferred debt financing costs   4,418,481    4,418,481    3,211,790 

 

See accompanying notes to financial statements.

 

S-6

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
19TH HOLDINGS GOLF, LLC  Consumer goods: Durable  Term Loan  Loan  1M USD SOFR+   3.00%   0.50%   7.67%  2/7/2029  $1,997,500   $1,924,905   $1,901,380 
888 Acquisitions Limited  Hotel, Gaming & Leisure  Term Loan B  Loan  3M USD SOFR+   5.25%   0.00%   9.93%  7/8/2028   2,494,565    2,143,085    2,126,617 
ADMI Corp.  Healthcare & Pharmaceuticals  Term Loan B  Loan  1M USD LIBOR+   3.00%   0.00%   7.63%  4/30/2025   1,910,276    1,907,516    1,825,517 
Adtalem Global Education Inc.  Services: Business  Term Loan B (02/21)  Loan  1M USD LIBOR+   4.00%   0.75%   8.63%  8/11/2028   691,846    686,475    689,992 
Aegis Sciences Corporation  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+   5.50%   1.00%   10.36%  5/9/2025   2,349,601    2,341,307    2,268,540 
Agiliti Health Inc.  Healthcare & Pharmaceuticals  Term Loan (09/20)  Loan  1M USD LIBOR+   2.75%   0.75%   7.38%  1/4/2026   214,286    213,103    212,946 
Agiliti Health Inc.  Healthcare & Pharmaceuticals  Term Loan (1/19)  Loan  1M USD LIBOR+   2.75%   0.00%   7.38%  1/4/2026   1,468,430    1,463,378    1,457,416 
AHEAD DB Holdings, LLC  Services: Business  Term Loan (04/21)  Loan  3M USD LIBOR+   3.75%   0.75%   8.48%  10/18/2027   2,955,000    2,871,299    2,915,285 
AI Convoy (Luxembourg) S.a.r.l.  Aerospace & Defense  Term Loan B (USD)  Loan  6M USD LIBOR+   3.50%   1.00%   8.17%  1/18/2027   -    -    - 
Air Canada  Transportation: Consumer  Term Loan B (07/21)  Loan  3M USD LIBOR+   3.50%   0.75%   8.37%  8/11/2028   1,990,000    1,851,613    1,984,408 
AIS HoldCo, LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+   5.00%   0.00%   9.83%  8/15/2025   4,789,642    4,700,517    4,622,004 
AIT Worldwide Logistics Holdings, Inc.  Transportation: Cargo  Term Loan (04/21)  Loan  1M USD LIBOR+   4.75%   0.75%   9.33%  4/6/2028   2,500,000    2,333,827    2,407,300 
AL GCX Holdings (Arclight) T/L B  Energy: Oil & Gas  Term Loan B  Loan  3M USD SOFR+   3.50%   0.50%   8.28%  5/17/2029   976,802    971,918    975,581 
Alchemy US Holdco 1, LLC  Metals & Mining  Term Loan  Loan  1M USD LIBOR+   5.50%   0.00%   5.60%  10/10/2025   1,654,803    1,644,633    1,551,378 
AlixPartners, LLP  Banking, Finance, Insurance & Real Estate  Term Loan B (01/21)  Loan  1M USD LIBOR+   2.75%   0.50%   7.38%  2/4/2028   245,625    245,275    245,050 
Alkermes, Inc.  Healthcare & Pharmaceuticals  Term Loan B (3/21)  Loan  1M USD LIBOR+   2.50%   0.50%   7.11%  3/12/2026   2,126,218    2,112,914    2,062,432 
Allen Media, LLC  Media: Diversified & Production  Term Loan (7/21)  Loan  3M USD SOFR+   5.50%   0.00%   10.23%  2/10/2027   4,394,261    4,368,566    3,649,434 
Alliant Holdings Intermediate, LLC  Banking, Finance, Insurance & Real Estate  Term Loan B4  Loan  1M USD LIBOR+   3.50%   0.50%   8.09%  11/5/2027   987,500    986,800    974,781 
Allied Universal Holdco LLC  Services: Business  Term Loan 4/21  Loan  1M USD SOFR+   3.75%   0.50%   8.47%  5/12/2028   1,975,000    1,967,474    1,900,404 

 

S-7

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
Altisource Solutions S.a r.l.  Banking, Finance, Insurance & Real Estate  Term Loan B (03/18)  Loan  3M USD LIBOR+   4.00%   1.00%   8.73%  4/3/2024   1,126,283    1,124,635    893,142 
Altium Packaging LLC  Containers, Packaging & Glass  Term Loan (01/21)  Loan  1M USD LIBOR+   2.75%   0.50%   7.38%  1/29/2028   491,250    489,554    480,506 
American Airlines T/L (2/23)  Transportation: Consumer  Term Loan  Loan  N/A   N/A    N/A    N/A   N/A   -    27    - 
American Axle & Manufacturing Inc.  Automotive  Term Loan (12/22)  Loan  1M USD SOFR+   3.50%   0.50%   8.16%  12/5/2029   500,000    485,367    499,000 
American Greetings Corporation  Media: Advertising, Printing & Publishing  Term Loan  Loan  1M USD LIBOR+   4.50%   1.00%   9.07%  4/6/2024   3,012,861    3,011,462    3,011,596 
American Trailer World Corp  Automotive  Term Loan  Loan  1M USD SOFR+   3.75%   0.75%   8.47%  3/3/2028   1,357,439    1,354,762    1,194,967 
AmWINS Group, LLC  Banking, Finance, Insurance & Real Estate  Term Loan 2/21  Loan  1M USD LIBOR+   2.25%   0.75%   6.88%  2/17/2028   1,960,017    1,940,778    1,926,462 
Anastasia Parent LLC  Consumer goods: Non-durable  Term Loan  Loan  3M USD LIBOR+   3.75%   0.00%   8.48%  8/11/2025   957,500    955,643    791,134 
Anchor Glass Container Corporation  Containers, Packaging & Glass  Term Loan (07/17)  Loan  3M USD LIBOR+   2.75%   1.00%   7.48%  12/7/2023   470,138    469,901    333,915 
Anchor Packaging, LLC  Containers, Packaging & Glass  Term Loan B  Loan  1M USD LIBOR+   4.00%   0.00%   8.63%  7/18/2026   977,215    971,052    952,785 
ANI Pharmaceuticals, Inc.  Healthcare & Pharmaceuticals  Term Loan B  Loan  1M USD LIBOR+   6.00%   0.75%   10.63%  11/19/2027   2,970,000    2,922,446    2,866,050 
AP Core Holdings II LLC  High Tech Industries  Term Loan B1  Loan  1M USD LIBOR+   5.50%   0.75%   10.13%  9/1/2027   1,875,000    1,852,824    1,802,344 
AP Core Holdings II LLC  High Tech Industries  Term Loan B2  Loan  1M USD LIBOR+   5.50%   0.75%   10.13%  9/1/2027   500,000    494,095    480,415 
APEX GROUP TREASURY LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  3M USD SOFR+   5.00%   0.50%   9.66%  7/26/2028   500,000    468,464    497,500 
APi Group DE, Inc. (J2 Acquisition)  Services: Business  Term Loan B  Loan  1M USD LIBOR+   2.50%   0.00%   7.13%  10/1/2026   1,757,184    1,751,429    1,754,548 
APLP Holdings Limited Partnership  Energy: Electricity  Term Loan B (3/21)  Loan  3M USD LIBOR+   3.75%   1.00%   8.48%  5/14/2027   440,541    437,327    440,726 
Apollo Commercial Real Estate Finance, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   2.75%   0.00%   7.38%  5/15/2026   2,939,086    2,914,348    2,850,914 
Apollo Commercial Real Estate Finance, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B1 (2/21)  Loan  1M USD LIBOR+   3.50%   0.50%   8.13%  3/6/2028   982,500    975,109    928,463 

 

S-8

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
AppLovin Corporation  High Tech Industries  Term Loan (10/21)  Loan  3M USD SOFR+   3.10%   0.50%   7.70%  10/21/2028   1,488,750    1,485,729    1,472,002 
AppLovin Corporation  High Tech Industries  Term Loan B  Loan  3M USD SOFR+   3.35%   0.00%   7.94%  8/15/2025   979,592    979,592    972,245 
Aramark Corporation  Services: Consumer  Term Loan B (4/21)  Loan  1M USD LIBOR+   2.50%   0.00%   7.13%  4/1/2028   1,753,715    1,747,448    1,747,139 
Aramark Corporation  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   1.75%   0.00%   6.38%  1/15/2027   2,331,250    2,280,733    2,305,023 
ARC FALCON I INC.  Chemicals, Plastics, & Rubber  Term Loan  Loan  1M USD LIBOR+   3.75%   0.50%   8.38%  9/23/2028   863,885    860,682    811,836 
ARC FALCON I INC. (a)  Chemicals, Plastics, & Rubber  Delayed Draw Term Loan  Loan  3M USD LIBOR+   1.00%   0.50%   1.00%  9/29/2028   -    (512)   (7,675)
Arches Buyer Inc.  Services: Consumer  Term Loan B  Loan  1M USD SOFR+   3.25%   0.50%   7.97%  12/6/2027   1,484,848    1,477,106    1,395,758 
Aretec Group, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (10/18)  Loan  1M USD SOFR+   4.25%   0.00%   8.97%  10/1/2025   1,916,203    1,913,228    1,887,460 
ASP BLADE HOLDINGS, INC.  Capital Equipment  Term Loan  Loan  3M USD LIBOR+   4.00%   0.50%   8.73%  10/7/2028   99,059    98,658    82,491 
Asplundh Tree Expert, LLC  Services: Business  Term Loan 2/21  Loan  1M USD LIBOR+   1.75%   0.00%   6.38%  9/7/2027   977,500    974,396    974,010 
AssuredPartners Capital, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B (2/20)  Loan  1M USD LIBOR+   3.50%   0.00%   8.13%  2/12/2027   989,796    986,847    967,773 
Assuredpartners Inc.  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD SOFR+   3.50%   0.50%   8.12%  2/12/2027   496,250    495,400    485,084 
Assuredpartners Inc.  Banking, Finance, Insurance & Real Estate  Incremental Term Loan (7/21)  Loan  1M USD LIBOR+   3.50%   0.50%   8.13%  2/12/2027   985,000    985,000    962,838 
ASTRO ONE ACQUISITION CORPORATION  Consumer goods: Durable  Term Loan  Loan  3M USD LIBOR+   5.50%   0.75%   10.23%  9/15/2028   2,970,000    2,946,187    1,767,150 
Asurion, LLC  Banking, Finance, Insurance & Real Estate  Term Loan B10  Loan  3M USD SOFR+   4.00%   0.00%   8.68%  8/19/2028   1,995,000    1,901,937    1,866,741 
Asurion, LLC  Banking, Finance, Insurance & Real Estate  Term Loan B8  Loan  1M USD LIBOR+   3.25%   0.00%   7.88%  12/18/2026   2,964,858    2,956,667    2,817,683 
ATHENAHEALTH GROUP INC.  Healthcare & Pharmaceuticals  Term Loan B (2/22)  Loan  1M USD SOFR+   3.50%   0.50%   8.06%  2/15/2029   1,330,543    1,325,206    1,227,426 
ATHENAHEALTH GROUP INC. (a)  Healthcare & Pharmaceuticals  Delayed Draw Term Loan (02/22)  Loan  3M USD LIBOR+   3.50%   0.50%   3.50%  2/15/2029   -    -    (12,636)

 

S-9

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
Avison Young (Canada) Inc  Services: Business  Term Loan (08/22)  Loan  1M USD SOFR+   7.00%   0.00%   11.73%  1/31/2026   748,125    708,918    635,906 
Avison Young (Canada) Inc  Services: Business  Term Loan  Loan  1M USD SOFR+   5.75%   0.00%   10.48%  1/31/2026   3,370,882    3,344,831    2,646,142 
Avolon TLB Borrower 1 (US) LLC  Capital Equipment  Term Loan B5 (7/21)  Loan  1M USD LIBOR+   2.25%   0.50%   6.85%  12/1/2027   490,000    486,530    489,539 
Avolon TLB Borrower 1 (US) LLC  Capital Equipment  Term Loan B3  Loan  1M USD LIBOR+   1.75%   0.75%   6.35%  1/15/2025   1,000,000    932,184    998,440 
Axalta Coating Systems Dutch Holding B B.V.  Chemicals, Plastics, & Rubber  Term Loan B-4 Dollar  Loan  3M USD SOFR+   3.00%   0.50%   7.51%  12/7/2029   1,000,000    990,447    1,003,570 
AZURITY PHARMACEUTICALS, INC.  Healthcare & Pharmaceuticals  Term Loan B  Loan  3M USD LIBOR+   6.00%   0.75%   10.75%  9/20/2027   475,000    463,094    457,188 
B&G Foods, Inc.  Beverage, Food & Tobacco  Term Loan  Loan  1M USD LIBOR+   2.50%   0.00%   7.13%  10/10/2026   642,295    638,890    613,391 
B.C. Unlimited Liability Co (Burger King)  Beverage, Food & Tobacco  Term Loan B4  Loan  1M USD LIBOR+   1.75%   0.00%   6.38%  11/19/2026   1,455,000    1,430,342    1,440,712 
BAKELITE UK INTERMEDIATE LTD.  Chemicals, Plastics, & Rubber  Term Loan  Loan  3M USD SOFR+   4.00%   0.50%   8.73%  5/29/2029   995,000    990,609    940,275 
Baldwin Risk Partners, LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   3.50%   0.50%   8.10%  10/14/2027   1,226,325    1,215,617    1,205,637 
Bausch Health Companies Inc.  Healthcare & Pharmaceuticals  Term Loan B (1/22)  Loan  1M USD SOFR+   5.25%   0.50%   9.91%  2/1/2027   1,950,000    1,764,574    1,534,299 
Belfor Holdings Inc.  Services: Consumer  Term Loan B-2 (3/22)  Loan  1M USD SOFR+   4.25%   0.50%   8.87%  4/6/2026   994,911    971,026    992,424 
Belfor Holdings Inc.  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   4.00%   0.00%   8.63%  4/6/2026   245,547    245,547    244,995 
Belron Finance US LLC  Automotive  Term Loan B (3/21)  Loan  3M USD LIBOR+   2.50%   0.50%   7.38%  4/13/2028   1,965,000    1,950,181    1,960,913 
Bengal Debt Merger Sub LLC  Beverage, Food & Tobacco  Term Loan  Loan  3M USD SOFR+   3.25%   0.50%   7.93%  1/24/2029   1,990,000    1,988,811    1,804,273 
Blackstone Mortgage Trust, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (6/21)  Loan  1M USD LIBOR+   2.75%   0.50%   7.38%  4/23/2026   1,465,141    1,457,842    1,441,332 
Blackstone Mortgage Trust, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   2.25%   0.00%   6.88%  4/23/2026   979,747    975,006    952,804 
Blue Tree Holdings, Inc.  Chemicals, Plastics, & Rubber  Term Loan (2/21)  Loan  3M USD LIBOR+   2.50%   0.00%   7.23%  3/4/2028   982,500    980,692    967,763 

 

S-10

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
Bombardier Recreational Products, Inc.  Consumer goods: Durable  Term Loan 12/22  Loan  1M USD SOFR+   3.50%   0.50%   8.12%  12/12/2029   498,750    486,572    496,007 
Bombardier Recreational Products, Inc.  Consumer goods: Durable  Term Loan (1/20)  Loan  1M USD LIBOR+   2.00%   0.00%   6.63%  5/24/2027   1,455,049    1,449,140    1,416,854 
Boxer Parent Company, Inc.  High Tech Industries  Term Loan (2/21)  Loan  1M USD LIBOR+   3.75%   0.00%   8.38%  10/2/2025   516,794    516,794    509,827 
Bracket Intermediate Holding Corp  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+   4.25%   0.00%   9.04%  9/5/2025   957,500    955,597    929,378 
BrightSpring Health Services (Phoenix Guarantor)  Healthcare & Pharmaceuticals  Term Loan B-3  Loan  1M USD LIBOR+   3.50%   0.00%   8.13%  3/5/2026   982,500    982,500    967,556 
BroadStreet Partners, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B3  Loan  1M USD LIBOR+   3.00%   0.00%   7.63%  1/22/2027   2,948,786    2,944,577    2,906,412 
Brookfield WEC Holdings Inc.  Energy: Electricity  Term Loan (1/21)  Loan  1M USD LIBOR+   2.75%   0.50%   7.38%  8/1/2025   1,462,613    1,464,152    1,456,090 
BROWN GROUP HOLDING, LLC  Aerospace & Defense  Term Loan B-2  Loan  1M USD SOFR+   3.75%   0.00%   8.37%  6/8/2029   498,750    487,209    498,336 
Buckeye Partners, L.P.  Utilities: Oil & Gas  Term Loan (1/21)  Loan  1M USD LIBOR+   2.25%   0.00%   6.82%  11/1/2026   1,950,188    1,941,198    1,946,931 
BW Gas & Convenience Holdings LLC  Beverage, Food & Tobacco  Term Loan B  Loan  1M USD LIBOR+   3.50%   0.50%   8.13%  3/31/2028   2,462,500    2,443,814    2,437,875 
Callaway Golf Company  Retail  Term Loan B  Loan  1M USD LIBOR+   4.50%   0.00%   9.13%  1/4/2026   675,000    668,575    674,582 
Camping World, Inc.  Retail  Term Loan B (5/21)  Loan  1M USD LIBOR+   2.50%   0.75%   7.09%  6/5/2028   2,487,342    2,268,038    2,208,560 
CareerBuilder, LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+   6.75%   1.00%   11.48%  7/31/2023   5,393,388    5,347,671    3,513,792 
Castle US Holding Corporation  Media: Advertising, Printing & Publishing  Term Loan B (USD)  Loan  1M USD LIBOR+   3.75%   0.00%   8.38%  1/27/2027   1,963,384    1,954,023    1,375,469 
CASTLELAKE AVIATION LLC  Aerospace & Defense  Term Loan B  Loan  1M USD SOFR+   2.75%   0.50%   7.31%  10/21/2027   1,000,000    992,500    987,080 
CBI BUYER, INC.  Consumer goods: Durable  Term Loan  Loan  1M USD LIBOR+   3.25%   0.50%   7.88%  1/6/2028   2,969,887    2,814,181    2,026,948 
CCC Intelligent Solutions Inc.  Services: Business  Term Loan B  Loan  1M USD LIBOR+   2.25%   0.50%   6.88%  9/16/2028   247,500    247,017    244,612 
CCI Buyer, Inc  Telecommunications  Term Loan  Loan  3M USD SOFR+   4.00%   0.75%   8.58%  12/17/2027   245,625    243,880    241,223 

 

S-11

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
CCRR Parent, Inc.  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD SOFR+   4.25%   0.50%   8.97%  3/5/2028   1,000,000    951,484    975,000 
CCRR Parent, Inc.  Healthcare & Pharmaceuticals  Term Loan B  Loan  1M USD LIBOR+   3.75%   0.75%   8.39%  3/5/2028   982,500    978,899    957,938 
CCS-CMGC Holdings, Inc.  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD LIBOR+   5.50%   0.00%   10.13%  9/25/2025   2,400,000    2,390,330    1,605,504 
CDK GLOBAL, INC.  High Tech Industries  Term Loan B  Loan  3M USD SOFR+   4.50%   0.50%   9.08%  7/6/2029   1,000,000    971,508    996,150 
Cengage Learning, Inc.  Media: Advertising, Printing & Publishing  Term Loan B (6/21)  Loan  6M USD LIBOR+   4.75%   1.00%   9.88%  7/14/2026   2,962,500    2,942,124    2,794,171 
CENTURI GROUP, INC.  Construction & Building  Term Loan B  Loan  3M USD LIBOR+   2.50%   0.50%   7.45%  8/27/2028   878,330    871,190    870,100 
CenturyLink, Inc.  Telecommunications  Term Loan B (1/20)  Loan  1M USD LIBOR+   2.25%   0.00%   6.88%  3/15/2027   3,887,492    3,883,600    3,208,269 
Charlotte Buyer, Inc.  Services: Business  Term Loan B  Loan  1M USD SOFR+   5.25%   0.00%   9.81%  2/11/2028   1,500,000    1,403,100    1,455,945 
Chemours Company, (The)  Chemicals, Plastics, & Rubber  Term Loan  Loan  1M USD LIBOR+   1.75%   0.00%   6.39%  4/3/2025   905,031    880,859    898,406 
Churchill Downs Incorporated  Hotel, Gaming & Leisure  Term Loan B1 (3/21)  Loan  1M USD LIBOR+   2.00%   0.00%   6.64%  3/17/2028   491,250    490,382    486,952 
CIMPRESS PUBLIC LIMITED COMPANY  Media: Advertising, Printing & Publishing  USD Term Loan  Loan  1M USD LIBOR+   3.50%   0.50%   8.13%  5/17/2028   1,979,950    1,892,607    1,785,419 
CITADEL SECURITIES LP  Banking, Finance, Insurance & Real Estate  Term Loan B (01/21)  Loan  1M USD SOFR+   2.50%   0.00%   7.23%  2/2/2028   4,912,500    4,910,914    4,865,684 
Clarios Global LP  Automotive  Term Loan B1  Loan  1M USD LIBOR+   3.25%   0.00%   7.88%  4/30/2026   1,267,812    1,261,524    1,260,091 
Claros Mortgage Trust, Inc  Banking, Finance, Insurance & Real Estate  Term Loan B-1 (11/21)  Loan  1M USD SOFR+   4.50%   0.50%   9.16%  8/9/2026   3,439,962    3,421,651    3,401,262 
CLYDESDALE ACQUISITION HOLDINGS, INC.  Containers, Packaging & Glass  Term Loan B  Loan  1M USD SOFR+   4.18%   0.50%   8.89%  4/13/2029   1,492,500    1,458,949    1,469,993 
Cole Haan  Consumer goods: Non-durable  Term Loan B  Loan  3M USD LIBOR+   5.50%   0.00%   10.23%  2/7/2025   875,000    871,486    841,461 
Columbus McKinnon Corporation  Capital Equipment  Term Loan (4/21)  Loan  3M USD LIBOR+   2.75%   0.50%   7.50%  5/14/2028   449,172    448,339    446,926 
Conduent, Inc.  Services: Business  Term Loan B  Loan  1M USD LIBOR+   4.25%   0.50%   8.88%  10/16/2028   1,787,985    1,755,247    1,742,177 
Connect Finco SARL  Telecommunications  Term Loan (1/21)  Loan  1M USD SOFR+   3.50%   1.00%   8.14%  12/11/2026   2,917,500    2,816,917    2,863,526 
Consolidated Communications, Inc.  Telecommunications  Term Loan B  Loan  1M USD LIBOR+   3.50%   0.75%   8.19%  10/2/2027   2,714,005    2,520,099    2,435,819 

 

S-12

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
CORAL-US CO-BORROWER LLC   Telecommunications   Term Loan B-5   Loan   1M USD LIBOR+     2.25 %     0.00 %     6.84 %   1/31/2028     4,000,000       3,988,733       3,867,160  
Corelogic, Inc.   Services: Business   Term Loan (4/21)   Loan   1M USD LIBOR+     3.50 %     0.50 %     8.19 %   6/2/2028     2,468,750       2,459,383       2,110,164  
Cortes NP Acquisition Corp (Vertiv)   Capital Equipment   Term Loan 2/21   Loan   1M USD LIBOR+     2.75 %     0.00 %     7.32 %   3/2/2027     1,960,000       1,960,000       1,934,579  
COWEN INC.   Banking, Finance, Insurance & Real Estate   Term Loan   Loan   6M USD LIBOR+     3.25 %     0.00 %     7.43 %   3/24/2028     3,927,406       3,907,308       3,922,496  
Creative Artists Agency, LLC   Media: Diversified & Production   Term Loan B (02/23)   Loan   1M USD SOFR+     3.50 %     0.00 %     8.06 %   11/1/2028     1,600,000       1,588,000       1,595,008  
CROCS INC   Consumer goods: Durable   Term Loan   Loan   6M USD SOFR+     3.50 %     0.50 %     7.73 %   2/20/2029     2,512,500       2,421,039       2,504,133  
Cross Financial Corp   Banking, Finance, Insurance & Real Estate   Term Loan B (3/21)   Loan   1M USD LIBOR+     4.00 %     0.75 %     8.69 %   9/15/2027     492,500       492,174       489,422  
Crown Subsea Communications Holding, Inc.   Construction & Building   Term Loan (4/21)   Loan   1M USD LIBOR+     4.75 %     0.75 %     9.32 %   4/27/2027     3,404,110       3,377,740       3,340,283  
CSC Holdings LLC (Neptune Finco Corp.)   Media: Broadcasting & Subscription   Term Loan B-5   Loan   1M USD LIBOR+     2.50 %     0.00 %     7.09 %   4/15/2027     485,000       485,000       435,894  
CSC Holdings LLC (Neptune Finco Corp.)   Media: Broadcasting & Subscription   Term Loan 12/22   Loan   1M USD SOFR+     4.50 %     0.00 %     9.06 %   4/15/2027     2,400,032       2,389,363       2,244,030  
CTS Midco, LLC   High Tech Industries   Term Loan B   Loan   3M USD LIBOR+     6.00 %     1.00 %     10.83 %   11/2/2027     1,960,000       1,917,602       1,666,000  
Daseke Inc   Transportation: Cargo   Term Loan 2/21   Loan   1M USD LIBOR+     4.00 %     0.75 %     8.64 %   3/5/2028     1,473,750       1,468,500       1,468,223  
Dave & Buster’s Inc.   Hotel, Gaming & Leisure   Term Loan B (04/22)   Loan   1M USD SOFR+     5.00 %     0.50 %     9.75 %   6/29/2029     995,000       948,574       997,736  
DCert Buyer, Inc.   High Tech Industries   Term Loan   Loan   6M USD SOFR+     4.00 %     0.00 %     8.70 %   10/16/2026     1,469,773       1,469,773       1,446,257  
Delek US Holdings, Inc.   Utilities: Oil & Gas   Term Loan B (11/22)   Loan   1M USD SOFR+     3.50 %     0.50 %     8.22 %   11/16/2029     5,400,000       5,285,256       5,298,750  
Delta 2 Lux Sarl   Hotel, Gaming & Leisure   Term Loan B   Loan   1M USD SOFR+     3.25 %     0.50 %     7.87 %   1/15/2030     1,000,000       990,424       1,001,750  
DexKo Global, Inc. (Dragon Merger)   Automotive   Term Loan (9/21)   Loan   3M USD LIBOR+     3.75 %     0.50 %     8.48 %   10/4/2028     992,500       989,236       928,980  
DG Investment Intermediate Holdings 2, Inc.   Aerospace & Defense   Incremental Term Loan (3/22)   Loan   1M USD SOFR+     4.75 %     0.75 %     9.37 %   3/31/2028     498,750       479,659       488,152  
Diamond Sports Group, LLC (b)   Media: Broadcasting & Subscription   Second Lien Term Loan   Loan   3M USD SOFR+     3.40 %     0.00 %     8.03 %   8/24/2026     3,374,880       3,017,273       382,306  
Diamond Sports Group, LLC (b)   Media: Broadcasting & Subscription   1st Priority Term Loan   Loan   6M USD SOFR+     8.00 %     1.00 %     13.06 %   5/25/2026     342,343       333,975       318,951  

 

S-13

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
DIRECTV FINANCING, LLC  Media: Broadcasting & Subscription  Term Loan  Loan  1M USD LIBOR+   5.00%   0.75%   9.63%  8/2/2027   3,550,000    3,523,794    3,448,754 
DISCOVERY PURCHASER CORPORATION  Chemicals, Plastics, & Rubber  Term Loan  Loan  3M USD SOFR+   4.38%   0.50%   8.96%  10/4/2029   1,500,000    1,385,334    1,433,310 
Dispatch Acquisition Holdings, LLC  Environmental Industries  Term Loan B (3/21)  Loan  3M USD LIBOR+   4.25%   0.75%   8.98%  3/25/2028   492,500    488,806    434,631 
DOMTAR CORPORATION  Forest Products & Paper  Term Loan 9/21  Loan  1M USD LIBOR+   5.50%   0.75%   10.10%  11/30/2028   1,310,136    1,272,492    1,286,121 
DOTDASH MEREDITH, INC.  Media: Advertising, Printing & Publishing  Term Loan B  Loan  1M USD SOFR+   4.00%   0.50%   8.67%  11/30/2028   1,994,949    1,803,027    1,755,556 
DRI HOLDING INC.  Media: Advertising, Printing & Publishing  Term Loan (12/21)  Loan  1M USD LIBOR+   5.25%   0.50%   9.88%  12/15/2028   3,972,487    3,830,439    3,552,913 
DRW Holdings, LLC  Banking, Finance, Insurance & Real Estate  Term Loan (2/21)  Loan  1M USD LIBOR+   3.75%   0.00%   8.38%  3/1/2028   6,435,000    6,396,896    6,284,164 
DTZ U.S. Borrower, LLC  Construction & Building  Term Loan  Loan  1M USD LIBOR+   2.75%   0.00%   7.38%  8/21/2025   1,612,878    1,609,665    1,602,798 
DTZ U.S. Borrower, LLC  Construction & Building  Term Loan (01/23)  Loan  1M USD SOFR+   3.25%   0.00%   7.97%  1/31/2030   2,034,413    2,031,025    2,021,698 
EAB Global, Inc.  Services: Business  Term Loan (08/21)  Loan  1M USD LIBOR+   3.50%   0.50%   8.13%  8/16/2028   990,000    985,965    969,586 
Echo Global Logistics, Inc.  Services: Business  Term Loan  Loan  1M USD LIBOR+   3.50%   0.50%   8.13%  11/23/2028   1,985,000    1,981,077    1,916,776 
Edelman Financial Group Inc., The  Banking, Finance, Insurance & Real Estate  Term Loan B (3/21)  Loan  1M USD LIBOR+   3.50%   0.75%   8.13%  4/7/2028   2,188,547    2,182,686    2,129,281 
Electrical Components Inter., Inc.  Capital Equipment  Term Loan (6/18)  Loan  1M USD LIBOR+   4.25%   0.00%   8.88%  6/26/2025   1,888,404    1,888,404    1,719,638 
ELECTRON BIDCO INC.  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD LIBOR+   3.00%   0.50%   7.63%  11/1/2028   496,250    494,396    491,208 
ELO Touch Solutions, Inc.  Media: Diversified & Production  Term Loan (12/18)  Loan  1M USD LIBOR+   6.50%   0.00%   11.13%  12/14/2025   2,175,269    2,121,627    2,169,831 
Embecta Corp  Healthcare & Pharmaceuticals  Term Loan B  Loan  6M USD SOFR+   3.00%   0.50%   7.79%  3/30/2029   614,918    611,634    604,735 
Endo Luxembourg Finance Company I S.a.r.l.  Healthcare & Pharmaceuticals  Term Loan (3/21)  Loan  Prime   6.00%   0.75%   13.75%  3/27/2028   2,335,285    2,328,380    1,839,037 
Endure Digital, Inc.  High Tech Industries  Term Loan B  Loan  1M USD LIBOR+   3.50%   0.75%   8.07%  2/10/2028   2,462,500    2,453,593    2,276,581 
Entain Holdings (Gibraltar) Limited  Hotel, Gaming & Leisure  Term Loan B (10/22)  Loan  3M USD SOFR+   3.50%   0.50%   8.18%  10/30/2029   1,000,000    987,635    999,060 

 

S-14

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
Envision Healthcare Corporation  Healthcare & Pharmaceuticals  Term Loan B (06/18)  Loan  3M USD LIBOR+   3.75%   0.00%   8.48%  10/10/2025   4,784,383    4,782,311    1,202,076 
EOS U.S. FINCO LLC  Transportation: Cargo  Term Loan  Loan  3M USD SOFR+   6.00%   0.50%   10.60%  8/3/2029   1,000,000    923,495    986,250 
Equiniti Group PLC  Services: Business  Term Loan B  Loan  6M USD SOFR+   4.50%   0.50%   9.54%  12/11/2028   990,000    981,797    990,624 
EyeCare Partners, LLC  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+   3.75%   0.00%   8.48%  2/18/2027   1,948,081    1,948,081    1,621,174 
Finco I LLC  Banking, Finance, Insurance & Real Estate  Term Loan B (9/20)  Loan  1M USD LIBOR+   2.50%   0.00%   7.13%  6/27/2025   2,830,950    2,826,805    2,830,950 
First Brands Group, LLC  Automotive  1st Lien Term Loan (3/21)  Loan  6M USD SOFR+   5.00%   1.00%   10.25%  3/30/2027   4,912,500    4,854,265    4,754,367 
First Eagle Investment Management  Banking, Finance, Insurance & Real Estate  Refinancing Term Loan  Loan  3M USD LIBOR+   2.50%   0.00%   7.23%  2/1/2027   5,146,145    5,133,892    5,055,007 
First Student Bidco Inc.  Transportation: Consumer  Term Loan B  Loan  3M USD LIBOR+   3.00%   0.50%   7.73%  7/21/2028   723,088    718,928    689,255 
First Student Bidco Inc.  Transportation: Consumer  Term Loan C  Loan  3M USD LIBOR+   3.00%   0.50%   7.73%  7/21/2028   269,608    268,052    256,993 
Fitness International, LLC (LA Fitness)  Services: Consumer  Term Loan B (4/18)  Loan  3M USD SOFR+   3.25%   1.00%   8.08%  4/18/2025   1,330,058    1,326,810    1,268,211 
Flutter Financing B.V.  Hotel, Gaming & Leisure  Term Loan  Loan  3M USD LIBOR+   2.25%   0.00%   6.98%  7/21/2026   1,975,000    1,972,044    1,971,643 
Flutter Financing B.V.  Hotel, Gaming & Leisure  Third Amendment 2028-B Term Loan  Loan  3M USD SOFR+   3.25%   0.50%   8.09%  7/21/2028   748,125    732,248    747,848 
FOCUS FINANCIAL PARTNERS, LLC  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD SOFR+   3.25%   0.50%   7.87%  6/30/2028   1,487,298    1,470,684    1,477,765 
Franchise Group, Inc.  Services: Consumer  First Out Term Loan  Loan  3M USD LIBOR+   4.75%   0.75%   9.56%  3/10/2026   799,104    793,938    760,148 
Franchise Group, Inc.  Services: Consumer  Term Loan B  Loan  3M USD SOFR+   4.75%   0.75%   9.70%  3/10/2026   3,000,000    2,852,614    2,857,500 
Franklin Square Holdings, L.P.  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   2.25%   0.00%   6.94%  8/1/2025   4,308,730    4,296,025    4,303,344 
Froneri International (R&R Ice Cream)  Beverage, Food & Tobacco  Term Loan B-2  Loan  1M USD LIBOR+   2.25%   0.00%   6.88%  1/29/2027   1,950,000    1,948,124    1,915,524 
Garrett LX III S.a r.l.  Automotive  Dollar Term Loan  Loan  3M USD LIBOR+   3.25%   0.50%   8.08%  4/30/2028   1,481,250    1,475,822    1,460,261 

 

S-15

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
Gates Global LLC  Automotive  Term Loan (11/22)  Loan  1M USD SOFR+   3.50%   0.50%   8.12%  11/15/2029   249,375    242,119    249,121 
Gemini HDPE LLC  Chemicals, Plastics, & Rubber  Term Loan B (12/20)  Loan  3M USD LIBOR+   3.00%   0.50%   7.83%  12/31/2027   2,289,884    2,276,592    2,281,297 
Genesee & Wyoming, Inc.  Transportation: Cargo  Term Loan (11/19)  Loan  3M USD LIBOR+   2.00%   0.00%   6.73%  12/30/2026   1,458,750    1,454,820    1,453,892 
GGP Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   2.50%   0.00%   2.96%  8/27/2025   3,072,992    2,734,560    3,053,141 
Global Tel*Link Corporation  Telecommunications  Term Loan B  Loan  3M USD SOFR+   4.25%   0.00%   9.08%  11/29/2025   4,897,634    4,753,219    4,342,830 
Go Daddy Operating Company, LLC  High Tech Industries  Term Loan 2/21  Loan  1M USD LIBOR+   2.00%   0.00%   6.63%  8/10/2027   1,959,799    1,959,799    1,950,255 
GOLDEN WEST PACKAGING GROUP LLC  Forest Products & Paper  Term Loan (11/21)  Loan  1M USD LIBOR+   5.25%   0.75%   9.88%  12/1/2027   1,962,500    1,946,411    1,903,625 
Graham Packaging Co Inc  Containers, Packaging & Glass  Term Loan (2/21)  Loan  1M USD LIBOR+   3.00%   0.75%   7.63%  8/7/2027   962,517    957,931    956,501 
Great Outdoors Group, LLC  Retail  Term Loan B2  Loan  1M USD LIBOR+   3.75%   0.75%   8.38%  3/6/2028   980,094    976,551    964,471 
Greenhill & Co., Inc.  Banking, Finance, Insurance & Real Estate  Term Loan   Loan  3M USD LIBOR+   3.25%   0.00%   8.20%  4/12/2024   2,844,231    2,836,329    2,789,707 
Griffon Corporation  Consumer goods: Durable  Term Loan B  Loan  1M USD SOFR+   2.50%   0.50%   7.20%  1/24/2029   154,375    154,051    152,959 
Grosvenor Capital Management Holdings, LLLP  Banking, Finance, Insurance & Real Estate  Amendment 5 Term Loan  Loan  1M USD LIBOR+   2.50%   0.50%   7.13%  2/24/2028   2,836,805    2,834,453    2,808,437 
Groupe Solmax Inc.  Environmental Industries  Term Loan (6/21)  Loan  3M USD LIBOR+   4.75%   0.75%   9.48%  5/27/2028   1,994,937    1,625,873    1,720,633 
Harbor Freight Tools USA, Inc.  Retail  Term Loan B (06/21)  Loan  1M USD LIBOR+   2.75%   0.50%   7.38%  10/19/2027   3,438,442    3,420,645    3,324,355 
Helix Gen Funding, LLc  Energy: Electricity  Term Loan B (02/17)  Loan  1M USD LIBOR+   3.75%   1.00%   8.38%  6/3/2024   209,702    209,702    208,332 
Hillman Group Inc. (The) (New)  Consumer goods: Durable  Term Loan B-1 (2/21)  Loan  1M USD LIBOR+   2.75%   0.50%   7.38%  7/14/2028   3,479,167    3,473,274    3,441,105 
Hillman Group Inc. (The) (New) (a)  Consumer goods: Durable  Delayed Draw Term Loan (2/21)  Loan  1M USD LIBOR+   2.75%   0.50%   7.38%  7/14/2028   66,667    66,667    57,444 
HLF Financing SARL (Herbalife)  Consumer goods: Non-durable  Term Loan B (08/18)  Loan  1M USD LIBOR+   2.50%   0.00%   7.13%  8/18/2025   3,510,000    3,504,423    3,452,225 
Holley Purchaser, Inc  Automotive  Term Loan (11/21)  Loan  3M USD LIBOR+   3.75%   0.75%   8.48%  11/17/2028   2,317,577    2,309,047    1,888,825 

 

S-16

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

  

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
Howden Group Holdings  Banking, Finance, Insurance & Real Estate  Term Loan (1/21)  Loan  1M USD LIBOR+   3.25%   0.75%   7.94%  11/12/2027   2,152,191    2,144,311    2,117,218 
Hudson River Trading LLC  Banking, Finance, Insurance & Real Estate  Term Loan (3/21)  Loan  1M USD SOFR+   3.00%   0.00%   7.73%  3/17/2028   5,895,000    5,850,826    5,619,173 
Idera, Inc.  High Tech Industries  Term Loan (02/21)  Loan  3M USD LIBOR+   3.75%   0.75%   8.51%  3/2/2028   4,811,111    4,802,585    4,635,698 
IMA Financial Group, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (10/21)  Loan  1M USD LIBOR+   3.50%   0.50%   8.13%  11/1/2028   1,980,000    1,972,160    1,947,825 
INDY US BIDCO, LLC  Services: Business  Term Loan (11/21)  Loan  1M USD LIBOR+   3.75%   0.00%   8.38%  3/6/2028   2,215,703    2,215,226    1,888,200 
Ineos US Finance LLC  Chemicals, Plastics, & Rubber  Term Loan C  Loan  1M USD SOFR+   3.75%   0.00%   8.42%  2/9/2030   1,000,000    990,000    991,560 
INEOS US PETROCHEM LLC  Chemicals, Plastics, & Rubber  Term Loan (1/21)  Loan  1M USD LIBOR+   2.75%   0.50%   7.38%  1/29/2026   1,979,950    1,929,143    1,967,080 
Informatica Inc.  High Tech Industries  Term Loan B (10/21)  Loan  1M USD LIBOR+   2.75%   0.00%   7.44%  10/27/2028   496,250    495,896    494,761 
Ingram Micro Inc.  Wholesale  Term Loan  Loan  3M USD LIBOR+   3.50%   0.50%   8.23%  6/30/2028   1,477,500    1,465,872    1,468,266 
Inmar Acquisition Sub, Inc.  Services: Business  Term Loan B  Loan  1M USD LIBOR+   4.00%   1.00%   8.63%  5/1/2024   3,350,673    3,327,770    3,270,055 
Innophos, Inc.  Chemicals, Plastics, & Rubber  Term Loan B  Loan  1M USD LIBOR+   3.25%   0.00%   7.88%  2/4/2027   486,250    484,966    483,007 
INSTANT BRANDS HOLDINGS INC.  Consumer goods: Durable  Term Loan 4/21  Loan  3M USD LIBOR+   5.00%   0.75%   9.95%  4/7/2028   4,027,667    4,010,741    2,154,802 
IRB Holding Corporation  Beverage, Food & Tobacco  Term Loan B3  Loan  1M USD SOFR+   3.00%   0.75%   7.57%  12/14/2027   500,000    495,150    493,125 
IRB Holding T/L B (1/22)  Beverage, Food & Tobacco  Term Loan B  Loan  1M USD SOFR+   3.00%   0.75%   7.69%  12/15/2027   500,000    495,150    493,125 
Isagenix International, LLC (b)  Beverage, Food & Tobacco  Term Loan  Loan  3M USD LIBOR+   7.75%   1.00%   11.35%  6/14/2025   2,330,036    2,311,947    814,068 
J Jill Group, Inc  Retail  Priming Term Loan  Loan  3M USD LIBOR+   5.00%   1.00%   9.83%  5/8/2024   1,553,698    1,553,299    1,464,361 
Jane Street Group  Banking, Finance, Insurance & Real Estate  Term Loan (1/21)  Loan  1M USD LIBOR+   2.75%   0.00%   7.38%  1/31/2028   3,920,000    3,917,671    3,897,970 
Journey Personal Care Corp.  Consumer goods: Non-durable  Term Loan B  Loan  3M USD LIBOR+   4.25%   0.75%   8.98%  3/1/2028   985,000    981,310    731,569 

 

S-17

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
JP Intermediate B, LLC  Consumer goods: Non-durable  Term Loan  Loan  3M USD LIBOR+   5.50%   1.00%   10.33%  11/15/2025   3,884,160    3,863,896    2,469,199 
Klockner-Pentaplast of America, Inc.  Containers, Packaging & Glass  Term Loan (1/21) (USD)  Loan  6M USD SOFR+   4.75%   0.50%   10.13%  2/12/2026   1,473,750    1,469,605    1,354,936 
Kodiak BP, LLC  Construction & Building  Term Loan  Loan  3M USD LIBOR+   3.25%   0.75%   7.98%  3/13/2028   491,242    490,111    472,083 
KREF Holdings X LLC  Banking, Finance, Insurance & Real Estate  Term Loan (11/21)  Loan  1M USD LIBOR+   3.50%   0.50%   8.13%  9/1/2027   491,288    482,835    482,690 
Lakeland Tours, LLC  Hotel, Gaming & Leisure  Holdco Fixed Term Loan  Loan  Fixed   0.00%   0.00%   13.25%  9/27/2027   990,775    383,373    644,004 
Lealand Finance Company B.V.  Energy: Oil & Gas  Exit Term Loan  Loan  1M USD LIBOR+   1.00%   0.00%   5.63%  6/30/2025   345,078    345,078    221,426 
LHS BORROWER, LLC  Construction & Building  Term Loan (02/22)  Loan  1M USD SOFR+   4.75%   0.50%   9.47%  2/16/2029   997,487    815,989    817,940 
Lifetime Brands, Inc  Consumer goods: Non-durable  Term Loan B  Loan  1M USD SOFR+   3.50%   1.00%   8.23%  2/28/2025   2,616,496    2,602,628    2,295,975 
Liquid Tech Solutions Holdings, LLC  Services: Business  Term Loan  Loan  6M USD LIBOR+   4.75%   0.00%   8.92%  3/17/2028   985,000    982,312    940,675 
LogMeIn, Inc.  High Tech Industries  Term Loan (8/20)  Loan  1M USD LIBOR+   4.75%   0.00%   9.38%  8/31/2027   3,920,000    3,868,809    2,137,145 
LOYALTY VENTURES INC. (b)  Services: Business  Term Loan B  Loan  Prime   3.50%   0.50%   11.25%  11/3/2027   3,089,630    3,074,278    926,889 
LPL Holdings, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B1  Loan  1M USD LIBOR+   1.75%   0.00%   6.32%  11/11/2026   1,207,856    1,206,501    1,203,701 
LSF11 A5 HOLDCO LLC  Chemicals, Plastics, & Rubber  Term Loan (01/23)  Loan  1M USD SOFR+   4.25%   0.50%   8.97%  10/14/2028   500,000    486,534    489,165 
LSF11 A5 HOLDCO LLC  Chemicals, Plastics, & Rubber  Term Loan  Loan  1M USD SOFR+   3.50%   0.50%   8.23%  10/16/2028   248,125    247,170    241,508 
LSF9 Atlantis Holdings, LLC (A Wireless)  Retail  Term Loan B  Loan  3M USD SOFR+   7.25%   0.75%   11.83%  3/29/2029   2,962,500    2,872,908    2,888,438 
MAGNITE, INC.  Services: Business  Term Loan  Loan  1M USD LIBOR+   5.00%   0.75%   9.63%  4/28/2028   2,964,950    2,901,156    2,826,575 
Marriott Ownership Resorts, Inc.  Hotel, Gaming & Leisure  Term Loan (11/19)  Loan  1M USD LIBOR+   1.75%   0.00%   6.38%  8/29/2025   1,317,074    1,317,074    1,308,842 
Match Group, Inc, The  Services: Consumer  Term Loan (1/20)  Loan  3M USD LIBOR+   1.75%   0.00%   6.49%  2/15/2027   250,000    249,658    247,500 
Maxar Technologies Inc  Aerospace & Defense  Term Loan (6/22)  Loan  1M USD SOFR+   4.25%   0.50%   8.97%  6/14/2029   1,994,987    1,926,722    1,997,641 
Mayfield Agency Borrower Inc. (FeeCo)  Banking, Finance, Insurance & Real Estate  Term Loan B (02/23)  Loan  3M USD SOFR+   5.00%   0.00%   8.81%  2/27/2028   3,450,000    3,346,500    3,363,750 

 

S-18

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
McGraw-Hill Education, Inc.  Media: Advertising, Printing & Publishing  Term Loan (07/21)  Loan  3M USD LIBOR+   4.75%   0.50%   9.70%  7/28/2028   1,975,000    1,957,770    1,894,025 
MedAssets Software Inter Hldg, Inc.  High Tech Industries  Term Loan (11/21) (USD)  Loan  1M USD LIBOR+   4.00%   0.50%   8.63%  12/18/2028   496,250    493,413    462,753 
Mermaid Bidco Inc.  High Tech Industries  Term Loan B2  Loan  3M USD LIBOR+   3.50%   0.75%   8.30%  12/22/2027   983,769    981,224    964,093 
Messer Industries, LLC  Chemicals, Plastics, & Rubber  Term Loan B  Loan  3M USD LIBOR+   2.50%   0.00%   7.23%  3/1/2026   2,980,405    2,970,477    2,968,871 
Michaels Companies Inc  Retail  Term Loan B (Magic Mergeco)  Loan  3M USD LIBOR+   4.25%   0.75%   8.98%  4/8/2028   2,467,450    2,452,022    2,254,632 
MPH Acquisition Holdings LLC (Multiplan)  Services: Business  Term Loan B (08/21)  Loan  3M USD LIBOR+   4.25%   0.50%   9.20%  9/1/2028   2,992,424    2,725,679    2,509,148 
MW Industries, Inc. (Helix Acquisition Holdings)  Capital Equipment  Term Loan (2019 Incremental)  Loan  3M USD LIBOR+   3.75%   0.00%   8.48%  9/30/2024   2,842,097    2,823,791    2,778,150 
NAB Holdings, LLC (North American Bancard)  Banking, Finance, Insurance & Real Estate  Term Loan (11/21)  Loan  3M USD SOFR+   3.00%   0.50%   7.73%  11/23/2028   2,970,000    2,963,897    2,927,678 
Napa Management Services Corp  Healthcare & Pharmaceuticals  Term Loan B (02/22)  Loan  1M USD SOFR+   5.25%   0.75%   9.95%  2/22/2029   3,000,000    2,407,500    2,285,640 
Natgasoline LLC  Chemicals, Plastics, & Rubber  Term Loan  Loan  1M USD LIBOR+   3.50%   0.00%   8.19%  11/14/2025   3,436,481    3,419,311    3,395,690 
National Mentor Holdings, Inc.  Healthcare & Pharmaceuticals  Term Loan 2/21  Loan  1M USD SOFR+   3.75%   0.75%   8.47%  3/2/2028   2,736,043    2,727,702    2,108,477 
National Mentor Holdings, Inc.  Healthcare & Pharmaceuticals  Term Loan C 2/21  Loan  3M USD LIBOR+   3.75%   0.75%   8.48%  3/2/2028   87,464    87,137    67,402 
NEW ERA CAP, LLC  Consumer goods: Durable  Term Loan (01/22)  Loan  3M USD LIBOR+   6.00%   0.75%   10.82%  7/13/2027   3,628,164    3,627,422    3,483,037 
Nexstar Broadcasting, Inc. (Mission Broadcasting)  Media: Broadcasting & Subscription  Term Loan  Loan  1M USD LIBOR+   2.50%   0.00%   7.13%  9/18/2026   657,625    652,850    655,745 
Next Level Apparel, Inc.  Retail  Term Loan  Loan  3M USD LIBOR+   5.50%   1.00%   10.33%  8/9/2024   1,675,340    1,670,519    1,373,779 
NortonLifeLock Inc.  High Tech Industries  Term Loan B  Loan  1M USD SOFR+   2.00%   0.50%   6.72%  9/12/2029   1,398,374    1,392,077    1,382,391 
Novae LLC  Automotive  Term Loan B  Loan  3M USD SOFR+   5.00%   0.75%   9.82%  12/22/2028   1,985,000    1,972,048    1,692,213 

 

S-19

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
Nuvei Technologies Corp.  High Tech Industries  US Term Loan  Loan  1M USD LIBOR+   2.50%   0.50%   7.13%  9/29/2025   2,216,250    2,213,211    2,210,709 
Olaplex, Inc.  Consumer goods: Non-durable  Term Loan (2/22)  Loan  1M USD SOFR+   3.50%   0.50%   8.20%  2/23/2029   2,492,500    2,386,817    2,224,556 
Open Text Corporation  High Tech Industries  Term Loan B  Loan  1M USD SOFR+   3.50%   0.50%   8.22%  8/24/2029   1,500,000    1,455,000    1,496,955 
Organon & Co.  Healthcare & Pharmaceuticals  Term Loan USD  Loan  3M USD LIBOR+   3.00%   0.50%   7.75%  6/2/2028   2,327,083    2,318,310    2,297,995 
Pacific Gas & Electric  Utilities: Electric  Term Loan  Loan  1M USD LIBOR+   3.00%   0.50%   7.69%  6/18/2025   1,464,944    1,460,891    1,457,619 
PACTIV EVERGREEN GROUP HOLDINGS INC.  Containers, Packaging & Glass  Term Loan B  Loan  1M USD LIBOR+   3.25%   0.50%   7.88%  9/20/2028   987,500    983,571    981,950 
Padagis LLC  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+   4.75%   0.50%   9.54%  7/6/2028   941,176    933,570    864,122 
Panther Guarantor II, L.P. (Forcepoint)  High Tech Industries  Term Loan 1/21  Loan  3M USD LIBOR+   4.25%   0.50%   9.08%  1/7/2028   492,500    489,882    461,719 
PAR PETROLEUM LLC  Energy: Oil & Gas  Term Loan 2/23  Loan  1M USD SOFR+   4.25%   0.50%   8.92%  2/13/2030   1,500,000    1,477,500    1,479,375 
PATAGONIA HOLDCO LLC  Telecommunications  Term Loan B  Loan  3M USD SOFR+   5.75%   0.50%   10.47%  8/1/2029   1,995,000    1,653,635    1,700,738 
Pathway Partners Vet Management Company LLC  Services: Business  Term Loan  Loan  1M USD LIBOR+   3.75%   0.00%   8.38%  3/30/2027   486,509    479,333    424,630 
PCI Gaming Authority  Hotel, Gaming & Leisure  Term Loan  Loan  1M USD LIBOR+   2.50%   0.00%   7.13%  5/29/2026   809,038    806,994    807,396 
PEARLS (Netherlands) Bidco B.V.  Chemicals, Plastics, & Rubber  USD Term Loan (02/22)  Loan  3M USD SOFR+   3.75%   0.50%   8.43%  2/28/2029   992,500    990,539    975,131 
PEDIATRIC ASSOCIATES HOLDING COMPANY, LLC  Healthcare & Pharmaceuticals  Term Loan (12/22)  Loan  1M USD LIBOR+   3.25%   0.50%   7.88%  12/29/2028   1,292,862    1,287,663    1,272,396 
PEDIATRIC ASSOCIATES HOLDING COMPANY, LLC (a)  Healthcare & Pharmaceuticals  Delayed Draw Term Loan (12/21)  Loan  1M USD LIBOR+   3.25%   0.50%   7.88%  12/29/2028   147,287    147,287    144,174 
Penn National Gaming, Inc  Hotel, Gaming & Leisure  Term Loan B  Loan  1M USD SOFR+   2.75%   0.50%   7.47%  5/3/2029   995,000    990,530    990,851 
Peraton Corp.  Aerospace & Defense  Term Loan B  Loan  1M USD LIBOR+   3.75%   0.75%   8.38%  2/1/2028   5,306,577    5,291,284    5,249,372 
PHYSICIAN PARTNERS, LLC  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD SOFR+   4.00%   0.50%   8.72%  12/23/2028   1,985,000    1,967,896    1,900,638 

 

S-20

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
Pike Corporation  Construction & Building  Term Loan (8/22)  Loan  1M USD SOFR+   3.50%   0.00%   8.12%  1/21/2028   498,750    487,274    497,294 
Pitney Bowes Inc  Services: Business  Term Loan B  Loan  1M USD SOFR+   4.00%   0.00%   8.73%  3/17/2028   3,939,924    3,914,651    3,789,734 
Plastipak Holdings Inc.  Containers, Packaging & Glass  Term Loan B (11/21)  Loan  1M USD LIBOR+   2.50%   0.50%   7.13%  12/1/2028   1,921,176    1,913,386    1,911,974 
Playtika Holding Corp.  High Tech Industries  Term Loan B (3/21)  Loan  1M USD LIBOR+   2.75%   0.00%   7.38%  3/13/2028   4,421,250    4,414,119    4,370,804 
PMHC II, INC.  Chemicals, Plastics, & Rubber  Term Loan (02/22)  Loan  3M USD SOFR+   4.25%   0.50%   9.08%  4/21/2029   1,995,000    1,986,056    1,710,912 
PointClickCare Technologies, Inc.  High Tech Industries  Term Loan B  Loan  3M USD LIBOR+   3.00%   0.75%   7.75%  12/29/2027   491,250    489,531    487,566 
Polymer Process Holdings, Inc.  Containers, Packaging & Glass  Term Loan  Loan  1M USD LIBOR+   4.75%   0.75%   9.38%  2/12/2028   5,403,750    5,359,857    5,025,488 
Pre-Paid Legal Services, Inc.  Services: Consumer  Term Loan (12/21)  Loan  1M USD LIBOR+   3.75%   0.50%   8.38%  12/15/2028   2,977,500    2,956,393    2,929,116 
Presidio, Inc.  Services: Business  Term Loan B (1/20)  Loan  3M USD SOFR+   3.50%   0.00%   8.28%  1/22/2027   487,500    486,909    485,267 
Prime Security Services Borrower, LLC (ADT)  Services: Consumer  Term Loan (1/21)  Loan  3M USD LIBOR+   2.75%   0.75%   7.52%  9/23/2026   3,520,468    3,520,468    3,511,667 
PRIORITY HOLDINGS, LLC  Services: Consumer  Term Loan  Loan  3M USD LIBOR+   5.75%   1.00%   10.70%  4/27/2027   2,955,000    2,932,371    2,936,531 
PriSo Acquisition Corporation  Construction & Building  Term Loan (01/21)  Loan  3M USD LIBOR+   3.25%   0.75%   8.00%  12/28/2027   491,245    489,458    450,310 
Project Leopard Holdings, Inc. (NEW)  High Tech Industries  Term Loan B (06/22)  Loan  6M USD SOFR+   5.25%   0.50%   9.80%  7/20/2029   1,000,000    933,902    924,690 
Prometric Inc. (Sarbacane Bidco)  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   3.00%   1.00%   7.64%  1/29/2025   476,438    475,777    444,278 
PUG LLC  Services: Consumer  Term Loan B (02/20)  Loan  1M USD LIBOR+   3.50%   0.00%   8.13%  2/12/2027   480,126    478,777    378,099 
QUEST BORROWER LIMITED  High Tech Industries  Term Loan (1/22)  Loan  3M USD SOFR+   4.25%   0.50%   9.08%  2/1/2029   1,990,000    1,972,710    1,707,539 
Rackspace Technology Global, Inc.  High Tech Industries  Term Loan (1/21)  Loan  3M USD LIBOR+   2.75%   0.75%   7.60%  2/15/2028   2,974,823    2,882,889    1,863,310 
RAND PARENT LLC  Transportation: Cargo  Term Loan B  Loan  1M USD SOFR+   4.25%   0.00%   8.80%  2/7/2030   1,500,000    1,462,500    1,455,000 

 

S-21

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
RealPage, Inc.  High Tech Industries  Term Loan (04/21)  Loan  1M USD LIBOR+   3.00%   0.50%   7.63%  4/24/2028   987,500    985,860    955,159 
Renaissance Learning, Inc.  Services: Consumer  Term Loan (5/18)  Loan  1M USD LIBOR+   3.25%   0.00%   7.88%  5/30/2025   2,938,373    2,922,432    2,871,025 
Rent-A-Center, Inc.  Retail  Term Loan B2 (9/21)  Loan  3M USD LIBOR+   3.25%   0.50%   8.13%  2/17/2028   1,976,155    1,934,422    1,927,997 
Research Now Group, Inc  Media: Advertising, Printing & Publishing  Term Loan  Loan  3M USD LIBOR+   5.50%   1.00%   10.31%  12/20/2024   4,298,135    4,249,328    3,200,305 
Resideo Funding Inc.  Services: Consumer  Term Loan (1/21)  Loan  3M USD LIBOR+   2.25%   0.50%   7.12%  2/11/2028   1,473,750    1,471,623    1,471,908 
Resolute Investment Managers (American Beacon), Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (10/20)  Loan  3M USD LIBOR+   4.25%   1.00%   8.98%  4/30/2024   3,038,616    3,035,050    2,385,313 
Restoration Hardware, Inc.  Retail  Term Loan (9/21)  Loan  1M USD LIBOR+   2.50%   0.50%   7.13%  10/20/2028   3,462,437    3,456,353    3,320,477 
Reynolds Consumer Products LLC  Containers, Packaging & Glass  Term Loan  Loan  1M USD SOFR+   1.75%   0.00%   6.47%  1/29/2027   1,276,932    1,276,737    1,273,880 
Reynolds Group Holdings Inc.  Containers, Packaging & Glass  Term Loan B2  Loan  1M USD LIBOR+   3.25%   0.00%   7.88%  2/5/2026   3,124,551    3,114,804    3,114,302 
Rocket Software, Inc.  High Tech Industries  Term Loan (11/18)  Loan  1M USD LIBOR+   4.25%   0.00%   8.88%  11/28/2025   2,875,317    2,870,016    2,818,414 
Russell Investments US Inst’l Holdco, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (10/20)  Loan  1M USD LIBOR+   3.50%   1.00%   8.13%  6/2/2025   5,590,662    5,565,048    5,499,813 
RV Retailer LLC  Automotive  Term Loan  Loan  3M USD SOFR+   3.75%   0.75%   8.55%  2/8/2028   2,957,631    2,912,519    2,516,441 
Ryan Specialty Group LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD SOFR+   3.00%   0.75%   7.72%  9/1/2027   1,478,623    1,467,543    1,474,010 
S&S HOLDINGS LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+   5.00%   0.50%   9.83%  3/10/2028   2,458,719    2,409,819    2,349,625 
Sally Holdings LLC  Retail  Term Loan B  Loan  1M USD SOFR+   2.50%   0.00%   7.06%  3/24/2030   500,000    496,250    498,750 
Samsonite International S.A.  Consumer goods: Non-durable  Term Loan B2  Loan  1M USD LIBOR+   3.00%   0.75%   7.63%  4/25/2025   927,537    914,134    927,537 
Schweitzer-Mauduit International, Inc.  High Tech Industries  Term Loan B  Loan  1M USD LIBOR+   3.75%   0.75%   8.44%  4/20/2028   2,955,000    2,942,014    2,895,900 
Scientific Games Holdings LP  Hotel, Gaming & Leisure  Term Loan B  Loan  3M USD SOFR+   3.50%   0.50%   8.10%  4/4/2029   498,750    497,703    489,942 

 

S-22

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
Sedgwick Claims Management Services, Inc.  Services: Business  Term Loan B 2/23  Loan  1M USD SOFR+   3.75%   0.00%   8.32%  2/17/2028   1,000,000    990,000    987,500 
SETANTA AIRCRAFT LEASING DAC  Aerospace & Defense  Term Loan  Loan  3M USD LIBOR+   2.00%   0.00%   6.73%  11/2/2028   1,000,000    998,000    991,250 
Signify Health, LLC  Healthcare & Pharmaceuticals  Term Loan B (6/21)  Loan  3M USD LIBOR+   3.00%   0.50%   7.73%  6/16/2028   493,750    491,846    493,750 
Sitel Worldwide Corporation  Services: Business  USD Term Loan (7/21)  Loan  1M USD LIBOR+   3.75%   0.50%   8.39%  8/28/2028   1,975,000    1,967,031    1,966,982 
SiteOne Landscape Supply, LLC  Services: Business  Term Loan (3/21)  Loan  1M USD LIBOR+   2.00%   0.50%   6.64%  3/18/2028   777,852    776,450    774,609 
SMG US Midco 2, Inc.  Services: Business  Term Loan (01/20)  Loan  3M USD LIBOR+   2.50%   0.00%   7.33%  1/23/2025   485,000    485,000    479,243 
Smyrna Ready Mix Concrete, LLC  Construction & Building  Term Loan  Loan  1M USD SOFR+   4.25%   0.50%   8.97%  4/2/2029   1,000,000    992,500    995,000 
Solis IV B.V.  Consumer goods: Durable  Term Loan B-1  Loan  3M USD SOFR+   3.50%   0.50%   8.37%  2/26/2029   1,994,987    1,724,963    1,826,132 
Sotheby’s  Services: Business  Term Loan (7/21)  Loan  3M USD LIBOR+   4.50%   0.50%   9.33%  1/15/2027   3,223,744    3,183,482    3,209,237 
Sparta U.S. HoldCo LLC  Chemicals, Plastics, & Rubber  Term Loan (04/21)  Loan  1M USD LIBOR+   3.25%   0.75%   7.82%  8/2/2028   1,980,000    1,972,123    1,964,160 
Specialty Pharma III Inc.  Services: Business  Term Loan  Loan  1M USD LIBOR+   4.25%   0.75%   8.88%  3/31/2028   1,975,000    1,959,930    1,821,938 
Spectrum Brands, Inc.  Consumer goods: Durable  Term Loan (2/21)  Loan  3M USD LIBOR+   2.00%   0.50%   6.96%  3/3/2028   491,250    490,363    487,158 
Spin Holdco, Inc.  Services: Consumer  Term Loan 3/21  Loan  3M USD LIBOR+   4.00%   0.75%   8.77%  3/4/2028   2,947,500    2,935,211    2,475,487 
Spirit Aerosystems Inc.  Aerospace & Defense  Term Loan (11/22)  Loan  3M USD SOFR+   4.50%   0.50%   9.18%  1/14/2027   498,750    484,414    498,541 
SRAM, LLC  Consumer goods: Durable  Term Loan (05/21)  Loan  1M USD LIBOR+   2.75%   0.50%   7.38%  5/12/2028   2,709,091    2,705,948    2,682,000 
SS&C Technologies, Inc.  Services: Business  Term Loan B3  Loan  1M USD LIBOR+   1.75%   0.00%   6.38%  4/16/2025   167,061    166,987    166,678 
SS&C Technologies, Inc.  Services: Business  Term Loan B4  Loan  1M USD LIBOR+   1.75%   0.00%   6.38%  4/16/2025   148,146    148,083    147,807 
SS&C Technologies, Inc.  Services: Business  Term Loan B-5  Loan  1M USD LIBOR+   1.75%   0.00%   6.38%  4/16/2025   458,152    457,773    457,199 
STANDARD INDUSTRIES INC.  Construction & Building  Term Loan B  Loan  6M USD LIBOR+   2.25%   0.50%   6.43%  9/22/2028   630,250    625,240    628,032 

 

S-23

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
Staples, Inc.  Wholesale  Term Loan (03/19)  Loan  3M USD LIBOR+   5.00%   0.00%   9.81%  4/16/2026   4,341,357    4,246,081    4,013,802 
Storable, Inc  High Tech Industries  Term Loan B  Loan  3M USD SOFR+   3.50%   0.50%   8.08%  4/17/2028   495,000    494,153    482,318 
Summit Materials, LLC  Metals & Mining  Term Loan B (12/22)  Loan  3M USD SOFR+   3.00%   0.00%   7.61%  12/13/2027   250,000    247,640    249,583 
Superannuation & Investments US LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   3.75%   0.50%   8.38%  12/1/2028   990,000    981,648    984,515 
Sweetwater Borrower, LLC  Retail  Term Loan (8/21)  Loan  1M USD LIBOR+   4.25%   0.75%   8.94%  8/2/2028   2,000,000    1,905,968    1,880,000 
Syncsort Incorporated  High Tech Industries  Term Loan B (10/21)  Loan  3M USD LIBOR+   4.00%   0.75%   8.82%  4/24/2028   2,469,987    2,468,993    2,243,984 
Ta TT Buyer LLC  Media: Broadcasting & Subscription  Term Loan 3/22  Loan  6M USD SOFR+   5.00%   0.50%   8.98%  4/2/2029   997,500    988,507    982,538 
Tenable Holdings, Inc.  Services: Business  Term Loan B (6/21)  Loan  3M USD LIBOR+   2.75%   0.50%   7.58%  7/7/2028   990,000    988,026    980,922 
Teneo Holdings LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD SOFR+   5.25%   1.00%   9.97%  7/15/2025   4,383,217    4,330,652    4,322,948 
Ten-X, LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   4.00%   1.00%   8.63%  9/27/2024   1,900,000    1,899,296    1,819,250 
The Dun & Bradstreet Corporation  Services: Business  Term Loan B  Loan  1M USD SOFR+   3.25%   0.00%   7.85%  1/18/2029   248,125    246,554    246,636 
The Dun & Bradstreet Corporation  Services: Business  Term Loan  Loan  1M USD LIBOR+   3.25%   0.00%   7.87%  2/6/2026   962,949    962,285    960,021 
THE KNOT WORLDWIDE INC.  Services: Consumer  Term Loan (1/22)  Loan  1M USD SOFR+   4.50%   0.00%   9.22%  12/19/2025   4,845,447    4,840,970    4,833,333 
Thor Industries, Inc.  Automotive  USD Term Loan (3/21)  Loan  1M USD LIBOR+   3.00%   0.00%   7.69%  2/1/2026   2,015,823    1,990,264    2,004,494 
Torrid LLC  Wholesale  Term Loan 5/21  Loan  3M USD LIBOR+   5.50%   0.75%   10.31%  6/14/2028   2,978,835    2,540,024    2,529,031 
TORY BURCH LLC  Retail  Term Loan  Loan  1M USD LIBOR+   3.50%   0.50%   8.13%  4/15/2028   1,329,211    1,232,469    1,268,147 
Tosca Services, LLC  Containers, Packaging & Glass  Term Loan (2/21)  Loan  1M USD SOFR+   3.50%   0.75%   8.23%  8/18/2027   490,000    485,078    383,180 
Trans Union LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   2.25%   0.50%   6.88%  12/1/2028   796,452    794,928    791,203 

 

S-24

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
Transdigm, Inc.  Aerospace & Defense  Term Loan H  Loan  3M USD SOFR+   3.25%   0.00%   7.83%  2/21/2027   1,993,370    1,990,666    1,989,941 
TRITON WATER HOLDINGS, INC.  Beverage, Food & Tobacco  Term Loan (03/21)  Loan  3M USD LIBOR+   3.50%   0.50%   8.23%  3/31/2028   1,477,502    1,471,933    1,372,422 
Tronox Finance LLC  Chemicals, Plastics, & Rubber  Term Loan  Loan  1M USD LIBOR+   2.25%   0.00%   6.88%  3/10/2028   346,923    346,338    340,907 
TruGreen Limited Partnership  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   4.00%   0.75%   8.63%  10/29/2027   954,501    949,189    873,368 
Uber Technologies, Inc.  Transportation: Consumer  Term Loan B (2/21)  Loan  3M USD LIBOR+   3.50%   0.00%   8.45%  2/25/2027   3,906,277    3,874,854    3,913,620 
Ultra Clean Holdings, Inc.  High Tech Industries  Incremental Term Loan 3/21  Loan  1M USD LIBOR+   3.75%   0.00%   8.38%  8/27/2025   820,338    817,776    819,928 
Unimin Corporation  Metals & Mining  Term Loan (12/20)  Loan  3M USD LIBOR+   4.00%   1.00%   8.78%  7/31/2026   496,815    476,431    489,984 
United Natural Foods, Inc  Beverage, Food & Tobacco  Term Loan B  Loan  1M USD SOFR+   3.25%   0.00%   7.98%  10/22/2025   1,289,967    1,252,901    1,291,309 
United Road Services Inc.  Transportation: Cargo  Term Loan (10/17)  Loan  3M USD LIBOR+   5.75%   1.00%   10.70%  9/1/2024   889,180    886,242    465,335 
Univision Communications Inc.  Media: Broadcasting & Subscription  Term Loan B (6/21)  Loan  1M USD LIBOR+   3.25%   0.75%   7.88%  3/15/2026   2,446,648    2,441,783    2,426,610 
Univision Communications Inc.  Media: Broadcasting & Subscription  Term Loan B (6/22)  Loan  3M USD SOFR+   4.25%   0.50%   8.83%  6/25/2029   248,750    241,881    248,233 
Utz Quality Foods, LLC  Beverage, Food & Tobacco  Term Loan B  Loan  1M USD SOFR+   3.00%   0.00%   7.73%  1/20/2028   1,828,465    1,827,288    1,825,046 
Vaco Holdings, LLC  Services: Business  Term Loan (01/22)  Loan  3M USD SOFR+   5.00%   0.75%   9.73%  1/19/2029   2,342,210    2,275,198    2,310,989 
Vericast Corp.  Media: Advertising, Printing & Publishing  Term Loan  Loan  3M USD SOFR+   7.75%   1.00%   12.33%  6/15/2026   1,201,006    1,199,817    939,787 
Verifone Systems, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (7/18)  Loan  3M USD LIBOR+   4.00%   0.00%   8.96%  8/20/2025   1,368,031    1,364,137    1,269,875 

 

S-25

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
Vertex Aerospace Services Corp  Aerospace & Defense  Term Loan (10/21)  Loan  1M USD LIBOR+   3.50%   0.75%   8.13%  12/6/2028   992,500    988,789    987,895 
VFH Parent LLC  Banking, Finance, Insurance & Real Estate  Term Loan (01/22)  Loan  1M USD SOFR+   3.00%   0.50%   7.66%  1/12/2029   3,069,879    3,063,097    3,036,111 
Viasat Inc  Telecommunications  Term Loan (2/22)  Loan  1M USD SOFR+   4.50%   0.50%   9.23%  3/2/2029   1,994,987    1,948,951    1,967,137 
Virtus Investment Partners, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B (9/21)  Loan  1M USD LIBOR+   2.25%   0.00%   6.85%  9/28/2028   2,853,409    2,845,646    2,834,377 
Vistra Energy Corp  Utilities: Electric  2018 Incremental Term Loan  Loan  1M USD LIBOR+   1.75%   0.00%   6.38%  12/31/2025   897,014    896,802    895,023 
Vizient, Inc  Healthcare & Pharmaceuticals  Term Loan 4/22  Loan  1M USD SOFR+   2.25%   0.50%   6.91%  5/16/2029   497,500    492,868    496,525 
VM Consolidated, Inc.  Construction & Building  Term Loan B (3/21)  Loan  1M USD LIBOR+   3.25%   0.00%   7.88%  3/24/2028   2,185,087    2,183,095    2,180,170 
Vouvray US Finance LLC  High Tech Industries  Term Loan  Loan  1M USD SOFR+   6.00%   1.00%   10.62%  9/9/2025   471,250    471,250    442,386 
Walker & Dunlop, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B (12/22)  Loan  1M USD SOFR+   3.00%   0.50%   7.72%  12/15/2028   500,000    490,249    496,250 
Warner Music Group Corp. (WMG Acquisition Corp.)  Hotel, Gaming & Leisure  Term Loan Incremental (11/22)  Loan  1M USD SOFR+   3.00%   0.50%   7.62%  1/19/2028   500,000    490,562    498,960 
Warner Music Group Corp. (WMG Acquisition Corp.)  Hotel, Gaming & Leisure  Term Loan G  Loan  1M USD LIBOR+   2.13%   0.00%   6.76%  1/20/2028   1,250,000    1,249,851    1,243,750 
Watlow Electric Manufacturing Company  High Tech Industries  Term Loan B  Loan  3M USD SOFR+   3.75%   0.50%   8.69%  3/2/2028   2,456,250    2,447,468    2,417,368 
West Corporation  Telecommunications  Term Loan B-3  Loan  3M USD SOFR+   4.00%   1.00%   8.93%  4/9/2027   1,189,119    1,172,865    1,044,939 

 

S-26

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR

Floor
   Current
Rate
(All In)
   Maturity
Date
  Principal/
Number
of Shares
   Cost   Fair
Value
 
WEX Inc.  Services: Business  Term Loan B (3/21)  Loan  1M USD LIBOR+   2.25%   0.00%   6.88%  3/31/2028   2,954,924    2,946,492    2,944,582 
WildBrain Ltd.  Media: Diversified & Production  Term Loan  Loan  1M USD SOFR+   4.25%   0.75%   8.98%  3/27/2028   1,965,000    1,935,307    1,864,903 
Xperi Corporation  High Tech Industries  Term Loan  Loan  1M USD LIBOR+   3.50%   0.00%   8.13%  6/8/2028   2,427,446    2,420,580    2,388,752 
Zayo Group, LLC  Telecommunications  Term Loan 4/22  Loan  1M USD SOFR+   4.25%   0.50%   8.87%  3/9/2027   992,500    971,029    842,027 
ZEBRA BUYER (Allspring) LLC  Banking, Finance, Insurance & Real Estate  Term Loan 4/21  Loan  3M USD LIBOR+   3.00%   0.50%   7.75%  11/1/2028   880,444    876,985    874,941 
Zekelman Industries, Inc.  Metals & Mining  Term Loan (01/20)  Loan  3M USD LIBOR+   2.00%   0.00%   6.73%  1/25/2027   961,471    961,471    948,251 
Zest Acquisition Corp.  Healthcare & Pharmaceuticals  Term Loan (1/23)  Loan  1M USD SOFR+   5.50%   0.00%   10.07%  1/31/2028   2,000,000    1,901,512    1,928,340 
Zodiac Pool Solutions  Consumer goods: Durable  Term Loan (1/22)  Loan  1M USD SOFR+   2.00%   0.50%   6.72%  1/29/2029   495,000    494,015    490,192 
                                      $645,599,001   $605,954,468 

 

S-27

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2023

 

   Number of Shares   Cost   Fair Value 
Cash and cash equivalents            
U.S. Bank Money Market (c)   23,776,950   $23,776,950   $23,776,950 
Total cash and cash equivalents   23,776,950   $23,776,950   $23,776,950 

 

(a)All or a portion of this investment has an unfunded commitment as of February 28, 2023.
(b)As of February 28, 2023, 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 28, 2023.
(d)Investments include Payment-in-Kind Interest.

 

LIBOR—London Interbank Offered Rate

SOFR - Secured Overnight Financing Rate

 

1M USD LIBOR—The 1 month USD LIBOR rate as of February 28, 2023 was 4.67%.

3M USD LIBOR—The 3 month USD LIBOR rate as of February 28, 2023 was 4.97%.

6M USD LIBOR—The 6 month USD LIBOR rate as of February 28, 2023 was 5.26%.

1M SOFR - The 1 month SOFR rate as of February 28, 2023 was 4.66%.

3M SOFR - The 3 month SOFR rate as of February 28, 2023 was 4.89%.

6M SOFR - The 6 month SOFR rate as of February 28, 2023 was 5.15%.

 

Prime—The Prime Rate as of February 28, 2023 was 7.75%.

 

See accompanying notes to financial statements.

 

S-28

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Fusion Connect Warrant  Telecommunications  Warrants  Equity  -   -    -    -    -    32,832    -    - 
J Jill Common Stock  Retail  Common stock  Equity  -   -    -    -    -    2,107    -    33,691 
19TH HOLDINGS GOLF, LLC  Consumer goods: Durable  Term Loan  Loan  3M USD SOFR+   3.25%   0.50%   3.75%   2/7/2029    500,000    497,530    493,750 
ADMI Corp.  Healthcare & Pharmaceuticals  Term Loan B  Loan  1M USD LIBOR+   2.75%   0.00%   2.96%   4/30/2025    1,930,276    1,925,558    1,892,886 
Adtalem Global Education Inc.  Services: Business  Term Loan B (02/21)  Loan  1M USD LIBOR+   4.50%   0.75%   5.25%   8/11/2028    2,000,000    1,981,559    1,977,920 
Aegis Sciences Corporation  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+   5.50%   1.00%   6.50%   5/9/2025    2,737,038    2,723,587    2,686,403 
Agiliti Health Inc.  Healthcare & Pharmaceuticals  Term Loan (1/19)  Loan  1M USD LIBOR+   2.75%   0.00%   2.88%   1/4/2026    1,483,686    1,476,852    1,470,704 
Agiliti Health Inc.  Healthcare & Pharmaceuticals  Term Loan (09/20)  Loan  1M USD LIBOR+   2.75%   0.75%   3.50%   1/4/2026    285,714    283,586    283,571 
AHEAD DB Holdings, LLC  Services: Business  Term Loan (04/21)  Loan  3M USD LIBOR+   3.75%   0.75%   4.50%   10/18/2027    2,985,000    2,885,411    2,962,135 
AI Convoy (Luxembourg) S.a.r.l.  Aerospace & Defense  Term Loan B (USD)  Loan  6M USD LIBOR+   3.50%   1.00%   4.50%   1/18/2027    1,469,671    1,464,591    1,460,485 
AIS HoldCo, LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+   5.00%   0.00%   5.30%   8/15/2025    4,789,642    4,670,148    4,705,823 
Alchemy Copyrights, LLC  Media: Diversified & Production  Term Loan B  Loan  1M USD LIBOR+   3.00%   0.50%   3.50%   3/10/2028    493,763    490,886    489,442 
Alchemy US Holdco 1, LLC  Metals & Mining  Term Loan  Loan  1M USD LIBOR+   5.50%   0.00%   5.60%   10/10/2025    1,654,803    1,640,863    1,644,874 
AlixPartners, LLP  Banking, Finance, Insurance & Real Estate  Term Loan B (01/21)  Loan  1M USD LIBOR+   2.75%   0.50%   3.25%   2/4/2028    248,125    247,608    245,217 
Alkermes, Inc.  Healthcare & Pharmaceuticals  Term Loan B (3/21)  Loan  3M USD LIBOR+   2.50%   0.50%   3.00%   3/12/2026    2,147,859    2,130,749    2,110,271 

S-29

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Allen Media, LLC  Media: Diversified & Production  Term Loan (7/21)  Loan  3M USD LIBOR+   5.50%   0.00%   5.72%   2/10/2027    4,439,454    4,407,744    4,412,639 
Alliant Holdings I, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B4  Loan  1M USD LIBOR+   3.50%   0.50%   4.00%   11/5/2027    997,500    996,393    987,944 
Allied Universal Holdco LLC  Services: Business  Term Loan 4/21  Loan  3M USD LIBOR+   3.75%   0.50%   4.25%   5/12/2028    1,995,000    1,985,516    1,966,412 
Altisource Solutions S.a r.l.  Banking, Finance, Insurance & Real Estate  Term Loan B (03/18)  Loan  3M USD LIBOR+   4.00%   1.00%   5.00%   4/3/2024    1,223,297    1,220,031    1,102,497 
Altium Packaging LLC  Containers, Packaging & Glass  Term Loan (01/21)  Loan  1M USD LIBOR+   2.75%   0.50%   3.25%   1/29/2028    496,250    494,097    485,084 
American Greetings Corporation  Media: Advertising, Printing & Publishing  Term Loan  Loan  1M USD LIBOR+   4.50%   1.00%   5.50%   4/6/2024    3,012,861    3,011,323    3,011,355 
American Trailer World Corp  Automotive  Term Loan  Loan  1M USD LIBOR+   3.75%   0.75%   4.50%   3/3/2028    1,990,000    1,984,442    1,954,558 
AmeriLife Holdings LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   4.00%   0.00%   4.11%   3/18/2027    1,976,415    1,967,087    1,956,651 
AmWINS Group, LLC  Banking, Finance, Insurance & Real Estate  Term Loan 2/21  Loan  1M USD LIBOR+   2.25%   0.75%   3.00%   2/17/2028    1,980,006    1,957,163    1,946,900 
Anastasia Parent LLC  Consumer goods: Non-durable  Term Loan  Loan  3M USD LIBOR+   3.75%   0.00%   3.97%   8/11/2025    967,500    964,919    832,253 
Anchor Glass Container Corporation  Containers, Packaging & Glass  Term Loan (07/17)  Loan  3M USD LIBOR+   2.75%   1.00%   3.75%   12/7/2023    475,113    474,420    406,882 
Anchor Packaging, LLC  Containers, Packaging & Glass  Term Loan B  Loan  1M USD LIBOR+   4.00%   0.00%   4.21%   7/18/2026    987,342    979,469    972,532 
ANI Pharmaceuticals, Inc.  Healthcare & Pharmaceuticals  Term Loan B  Loan  1M USD LIBOR+   6.00%   0.75%   6.75%   11/19/2027    3,000,000    2,943,100    3,000,000 
AP Core Holdings II LLC  High Tech Industries  Term Loan B1  Loan  1M USD LIBOR+   5.50%   0.75%   6.25%   9/1/2027    1,975,000    1,947,406    1,965,125 
AP Core Holdings II LLC  High Tech Industries  Term Loan B2  Loan  1M USD LIBOR+   5.50%   0.75%   6.25%   9/1/2027    500,000    493,024    498,125 

 

S-30

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
APi Group DE, Inc. (J2 Acquisition)  Services: Business  Term Loan B  Loan  1M USD LIBOR+   2.50%   0.00%   2.71%   10/1/2026    1,950,000    1,942,029    1,927,575 
APLP Holdings Limited Partnership  Energy: Electricity  Term Loan B (3/21)  Loan  1M USD LIBOR+   3.75%   1.00%   4.75%   5/14/2027    828,378    821,051    826,655 
Apollo Commercial Real Estate Finance, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   2.75%   0.00%   2.86%   5/15/2026    2,969,543    2,937,176    2,887,881 
Apollo Commercial Real Estate Finance, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B1 (2/21)  Loan  1M USD LIBOR+   3.50%   0.50%   4.00%   3/6/2028    992,500    983,643    982,575 
AppLovin Corporation  High Tech Industries  Term Loan B  Loan  1M USD LIBOR+   3.25%   0.00%   3.46%   8/15/2025    989,796    989,796    982,066 
AppLovin Corporation  High Tech Industries  Term Loan (10/21)  Loan  1M USD LIBOR+   3.00%   0.50%   3.50%   10/21/2028    1,496,250    1,492,669    1,481,288 
Aramark Corporation  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   1.75%   0.00%   1.96%   1/15/2027    2,331,250    2,268,549    2,279,776 
Aramark Corporation  Services: Consumer  Term Loan B (4/21)  Loan  1M USD LIBOR+   2.50%   0.00%   2.71%   4/1/2028    1,753,715    1,746,008    1,743,491 
ARC FALCON I INC.  Chemicals, Plastics, & Rubber  Term Loan  Loan  1M USD LIBOR+   3.75%   0.50%   4.25%   9/23/2028    872,611    868,610    855,526 
ARC FALCON I INC. (a)  Chemicals, Plastics, & Rubber  Delayed Draw Term Loan  Loan  N/A    N/A      N/A      N/A     9/22/2028    -    (601)   (2,494)
Arches Buyer Inc.  Services: Consumer  Term Loan B  Loan  1M USD LIBOR+   3.25%   0.50%   3.75%   12/6/2027    1,500,000    1,490,625    1,473,570 
Arctic Glacier U.S.A., Inc.  Beverage, Food & Tobacco  Term Loan (3/18)  Loan  3M USD LIBOR+   3.50%   1.00%   4.50%   3/20/2024    3,350,967    3,341,474    3,103,833 
Aretec Group, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (10/18)  Loan  1M USD LIBOR+   4.25%   0.00%   4.46%   10/1/2025    2,436,164    2,430,830    2,425,518 
ASP BLADE HOLDINGS, INC.  Capital Equipment  Term Loan  Loan  1M USD LIBOR+   4.00%   0.50%   4.50%   10/7/2028    100,000    99,530    99,542 
Asplundh Tree Expert, LLC  Services: Business  Term Loan 2/21  Loan  1M USD LIBOR+   1.75%   0.00%   1.96%   9/7/2027    987,500    983,579    973,458 

 

S-31

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name   Industry   Asset
Name
  Asset
Type
  Reference
Rate/Spread
    SOFR/ LIBOR
Floor
    Current
Rate
(All In)
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair
Value
 
Assured Partners
Capital, Inc.
  Banking, Finance, Insurance & Real Estate   Term Loan B (2/20)   Loan   1M USD LIBOR+     3.50 %     0.00 %     3.71 %     2/12/2027       1,000,000       996,250       984,580  
Assured Partners Inc.   Banking, Finance, Insurance & Real Estate   Incremental Term Loan (7/21)   Loan   1M USD LIBOR+     3.50 %     0.50 %     4.00 %     2/12/2027       995,006       995,006       978,837  
Assured Partners Inc.   Banking, Finance, Insurance & Real Estate   Term Loan   Loan   1M USD SOFR+     3.50 %     0.50 %     4.00 %     2/12/2027       500,000       498,811       491,875  
ASTRO ONE ACQUISITION CORPORATION   Consumer goods: Durable   Term Loan   Loan   1M USD LIBOR+     5.50 %     0.75 %     6.25 %     9/15/2028       3,000,000       2,971,643       2,968,140  
Asurion, LLC   Banking, Finance, Insurance & Real Estate   Term Loan B6   Loan   1M USD LIBOR+     3.13 %     0.00 %     3.33 %     11/3/2023       266,824       266,095       264,767  
Asurion, LLC   Banking, Finance, Insurance & Real Estate   Term Loan B8   Loan   1M USD LIBOR+     3.25 %     0.00 %     3.46 %     12/18/2026       2,995,112       2,984,120       2,939,882  
ATHENAHEALTH GROUP INC.   Healthcare & Pharmaceuticals   Term Loan B (2/22)   Loan   1M USD SOFR+     3.50 %     0.50 %     4.00 %     2/15/2029       1,282,609       1,276,322       1,269,462  
ATHENAHEALTH GROUP INC. (a)   Healthcare & Pharmaceuticals   Delayed Draw Term Loan (02/22)   Loan   N/A      N/A         N/A         N/A        2/15/2029       -       -       (2,228 )
Avast Software S.R.O. (Sybil Finance)   High Tech Industries   Term Loan (Sybil Software)   Loan   3M USD LIBOR+     2.00 %     0.00 %     2.22 %     3/22/2028       1,925,000       1,920,766       1,916,819  
Avaya, Inc.   Telecommunications   Term Loan B1   Loan   1M USD LIBOR+     4.25 %     0.00 %     4.44 %     12/15/2027       1,755,766       1,747,367       1,739,859  
Avaya, Inc.   Telecommunications   Term Loan B-2 (2/21)   Loan   1M USD LIBOR+     4.00 %     0.00 %     4.19 %     12/15/2027       1,000,000       1,000,000       988,590  
Avison Young (Canada) Inc   Services: Business   Term Loan   Loan   3M USD LIBOR+     5.75 %     0.00 %     5.97 %     1/31/2026       3,405,995       3,370,219       3,371,935  
Avolon TLB Borrower 1 (US) LLC   Capital Equipment   Term Loan B3   Loan   1M USD LIBOR+     1.75 %     0.75 %     2.50 %     1/15/2025       1,000,000       900,020       990,630  
Avolon TLB Borrower 1 (US) LLC   Capital Equipment   Term Loan B5 (7/21)   Loan   1M USD LIBOR+     2.25 %     0.50 %     2.75 %     12/1/2027       495,000       490,860       491,466  
AZURITY PHARMACEUTICALS, INC.   Healthcare & Pharmaceuticals   Term Loan B   Loan   3M USD LIBOR+     6.00 %     0.75 %     6.75 %     9/20/2027       500,000       485,751       495,000  

 

 

S-32

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
B&G Foods, Inc.  Beverage, Food & Tobacco  Term Loan  Loan  1M USD LIBOR+   2.50%   0.00%   2.71%   10/10/2026    706,458    701,732    701,605 
B.C. Unlimited Liability Co (Burger King)  Beverage, Food & Tobacco  Term Loan B4  Loan  1M USD LIBOR+   1.75%   0.00%   1.96%   11/19/2026    1,470,000    1,438,969    1,440,968 
BAKELITE UK INTERMEDIATE LTD.  Chemicals, Plastics, & Rubber  Term Loan  Loan  3M USD SOFR+   4.25%   0.00%   4.75%   2/1/2029    1,000,000    995,000    992,500 
Baldwin Risk Partners, LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   3.50%   0.50%   4.00%   10/14/2027    1,238,775    1,225,981    1,222,522 
Belfor Holdings Inc.  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   3.75%   0.00%   3.96%   4/6/2026    248,092    247,897    246,851 
Belron Finance US LLC  Automotive  Term Loan B (3/21)  Loan  3M USD LIBOR+   2.75%   0.50%   3.25%   4/13/2028    1,985,000    1,967,341    1,968,247 
Bengal Debt Merger Sub LLC  Beverage, Food & Tobacco  Term Loan  Loan  3M USD SOFR+   3.25%   0.50%   3.75%   1/24/2029    1,890,909    1,889,030    1,873,191 
Bengal Debt Merger Sub LLC  Beverage, Food & Tobacco  Delayed Draw Term Loan  Loan  3M USD SOFR+   3.25%   0.50%   3.75%   1/24/2029    109,091    109,048    108,069 
Blackstone Mortgage Trust, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   2.25%   0.00%   2.46%   4/23/2026    989,873    983,805    967,601 
Blackstone Mortgage Trust, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (6/21)  Loan  1M USD LIBOR+   2.75%   0.50%   3.25%   4/23/2026    1,480,053    1,470,897    1,464,335 
Blucora, Inc.  Services: Consumer  Term Loan (11/17)  Loan  3M USD LIBOR+   4.00%   1.00%   5.00%   5/22/2024    2,443,339    2,437,898    2,437,230 
Blue Tree Holdings, Inc.  Chemicals, Plastics, & Rubber  Term Loan (2/21)  Loan  3M USD LIBOR+   2.50%   0.00%   2.72%   3/4/2028    992,500    990,307    983,200 
Bombardier Recreational Products, Inc.  Consumer goods: Durable  Term Loan (1/20)  Loan  1M USD LIBOR+   2.00%   0.00%   2.21%   5/24/2027    1,470,049    1,461,460    1,442,486 
Boxer Parent Company, Inc.  High Tech Industries  Term Loan (2/21)  Loan  3M USD LIBOR+   3.75%   0.00%   3.97%   10/2/2025    522,846    522,846    516,310 
Bracket Intermediate Holding Corp  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+   4.25%   0.00%   4.47%   9/5/2025    967,500    964,897    959,034 

 

S-33

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
BrightSpring Health Services (Phoenix Guarantor)  Healthcare & Pharmaceuticals  Term Loan B-3  Loan  1M USD LIBOR+   3.50%   0.00%   3.66%   3/5/2026    992,500    992,500    980,342 
BroadStreet Partners, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B3  Loan  1M USD LIBOR+   3.00%   0.00%   3.21%   1/22/2027    2,979,108    2,973,591    2,930,697 
Brookfield WEC Holdings Inc.  Energy: Electricity  Term Loan (1/21)  Loan  1M USD LIBOR+   2.75%   0.50%   3.25%   8/1/2025    1,477,538    1,479,743    1,453,528 
Buckeye Partners, L.P.  Utilities: Oil & Gas  Term Loan (1/21)  Loan  1M USD LIBOR+   2.25%   0.00%   2.36%   11/1/2026    1,970,088    1,958,262    1,946,565 
BW Gas & Convenience Holdings LLC  Beverage, Food & Tobacco  Term Loan B  Loan  1M USD LIBOR+   3.50%   0.50%   4.00%   3/31/2028    2,487,500    2,465,358    2,475,063 
Callaway Golf Company  Retail  Term Loan B  Loan  1M USD LIBOR+   4.50%   0.00%   4.71%   1/4/2026    682,500    673,958    681,005 
CareerBuilder, LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+   6.75%   1.00%   7.75%   7/31/2023    5,393,388    5,246,921    4,159,650 
CareStream Health, Inc.  Healthcare & Pharmaceuticals  Term Loan  Loan  6M USD LIBOR+   6.75%   1.00%   7.75%   5/8/2023    2,184,163    2,181,757    2,184,163 
Casa Systems, Inc  Telecommunications  Term Loan  Loan  1M USD LIBOR+   4.00%   1.00%   5.00%   12/20/2023    1,391,125    1,387,217    1,349,391 
Castle US Holding Corporation  Media: Advertising, Printing & Publishing  Term Loan B (USD)  Loan  3M USD LIBOR+   3.75%   0.00%   3.97%   1/27/2027    1,980,130    1,968,915    1,934,864 
CBI BUYER, INC.  Consumer goods: Durable  Term Loan  Loan  3M USD LIBOR+   3.25%   0.50%   3.75%   1/6/2028    995,000    992,948    963,906 
CCC Intelligent Solutions Inc.  Services: Business  Term Loan B  Loan  3M USD LIBOR+   2.50%   0.50%   3.00%   9/16/2028    250,000    249,432    246,875 
CCI Buyer, Inc  Telecommunications  Term Loan  Loan  3M USD LIBOR+   3.75%   0.75%   4.50%   12/17/2027    248,125    246,017    245,257 
CCRR Parent, Inc.  Healthcare & Pharmaceuticals  Term Loan B  Loan  3M USD LIBOR+   3.75%   0.75%   4.50%   3/5/2028    992,500    988,070    986,297 
CCS-CMGC Holdings, Inc.  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD LIBOR+   5.50%   0.00%   5.71%   9/25/2025    2,425,000    2,412,003    2,371,456 

 

S-34

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Cengage Learning, Inc.  Media: Advertising, Printing & Publishing  Term Loan B (6/21)  Loan  6M USD LIBOR+   4.75%   1.00%   5.75%   7/14/2026    2,992,500    2,966,179    2,985,019 
CENTURI GROUP, INC.  Construction & Building  Term Loan B  Loan  1M USD LIBOR+   2.50%   0.50%   3.00%   8/27/2028    931,998    923,210    923,647 
CenturyLink, Inc.  Telecommunications  Term Loan B (1/20)  Loan  1M USD LIBOR+   2.25%   0.00%   2.46%   3/15/2027    3,929,899    3,924,411    3,823,045 
Chemours Company, (The)  Chemicals, Plastics, & Rubber  Term Loan  Loan  1M USD LIBOR+   1.75%   0.00%   1.96%   4/3/2025    915,661    880,331    896,780 
Churchill Downs Incorporated  Hotel, Gaming & Leisure  Term Loan B1 (3/21)  Loan  1M USD LIBOR+   2.00%   0.00%   2.21%   3/17/2028    496,250    495,147    489,427 
CIMPRESS PUBLIC LIMITED COMPANY  Media: Advertising, Printing & Publishing  USD Term Loan  Loan  1M USD LIBOR+   3.50%   0.50%   4.00%   5/17/2028    995,000    986,097    987,538 
CITADEL SECURITIES LP  Banking, Finance, Insurance & Real Estate  Term Loan B (01/21)  Loan  1M USD SOFR+   2.50%   0.00%   2.69%   2/2/2028    4,962,500    4,957,863    4,911,089 
Clarios Global LP  Automotive  Term Loan B1  Loan  1M USD LIBOR+   3.25%   0.00%   3.46%   4/30/2026    1,267,812    1,259,559    1,253,549 
Claros Mortgage Trust, Inc  Banking, Finance, Insurance & Real Estate  Term Loan B-1 (11/21)  Loan  1M USD SOFR+   4.50%   0.50%   5.00%   8/9/2026    3,474,709    3,452,852    3,457,336 
Cole Haan  Consumer goods: Non-durable  Term Loan B  Loan  3M USD LIBOR+   5.50%   0.00%   6.01%   2/7/2025    925,000    919,273    811,688 
Columbus McKinnon Corporation  Capital Equipment  Term Loan (4/21)  Loan  3M USD LIBOR+   2.75%   0.50%   3.25%   5/14/2028    487,192    486,099    482,929 
Compass Power Generation, LLC  Utilities: Electric  Term Loan B (08/18)  Loan  1M USD LIBOR+   3.50%   1.00%   4.50%   12/20/2024    1,707,152    1,704,898    1,686,120 
Conduent, Inc.  Services: Business  Term Loan B  Loan  1M USD LIBOR+   4.25%   0.50%   4.75%   10/16/2028    1,000,000    990,409    990,310 
Connect Finco SARL  Telecommunications  Term Loan (1/21)  Loan  1M USD LIBOR+   3.50%   1.00%   4.50%   12/11/2026    2,947,500    2,823,770    2,906,972 
Consolidated Communications, Inc.  Telecommunications  Term Loan B  Loan  1M USD LIBOR+   3.50%   0.75%   4.25%   10/2/2027    714,005    705,262    704,187 

 

S-35

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
CORAL-US CO-BORROWER LLC  Telecommunications  Term Loan B-5  Loan  1M USD LIBOR+   2.25%   0.00%   2.44%   1/31/2028    4,000,000    3,986,739    3,914,280 
CoreCivic, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (12/19)  Loan  1M USD LIBOR+   4.50%   1.00%   5.50%   12/18/2024    1,872,727    1,852,319    1,857,127 
Corelogic, Inc.  Services: Business  Term Loan (4/21)  Loan  1M USD LIBOR+   3.50%   0.50%   4.00%   6/2/2028    2,493,750    2,482,238    2,459,461 
Cortes NP Acquisition Corp (Vertiv)  Capital Equipment  Term Loan 2/21  Loan  1M USD LIBOR+   2.75%   0.00%   2.86%   3/2/2027    1,980,000    1,980,000    1,913,175 
COWEN INC.  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  6M USD LIBOR+   3.25%   0.00%   4.00%   3/24/2028    3,967,481    3,944,804    3,898,050 
CROCS INC  Consumer goods: Durable  Term Loan  Loan  3M USD SOFR+   3.50%   0.50%   4.03%   1/26/2029    1,000,000    995,000    987,500 
Cross Financial Corp  Banking, Finance, Insurance & Real Estate  Term Loan B (3/21)  Loan  6M USD LIBOR+   4.00%   0.75%   4.81%   9/15/2027    497,500    497,013    495,634 
Crown Subsea Communications Holding, Inc.  Construction & Building  Term Loan (4/21)  Loan  1M USD LIBOR+   4.75%   0.75%   5.50%   4/27/2027    2,404,110    2,382,506    2,402,114 
CSC Holdings LLC (Neptune Finco Corp.)  Media: Broadcasting & Subscription  Term Loan B (03/17)  Loan  1M USD LIBOR+   2.25%   0.00%   2.44%   7/15/2025    1,934,010    1,919,923    1,873,263 
CSC Holdings LLC (Neptune Finco Corp.)  Media: Broadcasting & Subscription  Term Loan B  Loan  1M USD LIBOR+   2.25%   0.00%   2.44%   1/15/2026    485,000    484,359    469,946 
CSC Holdings LLC (Neptune Finco Corp.)  Media: Broadcasting & Subscription  Term Loan B-5  Loan  1M USD LIBOR+   2.50%   0.00%   2.69%   4/15/2027    490,000    490,000    475,035 
CTS Midco, LLC  High Tech Industries  Term Loan B  Loan  3M USD LIBOR+   6.00%   1.00%   7.00%   11/2/2027    1,980,000    1,929,799    1,952,775 
Daseke Inc  Transportation: Cargo  Term Loan 2/21  Loan  1M USD LIBOR+   4.00%   0.75%   4.75%   3/5/2028    1,488,750    1,482,131    1,473,863 
DCert Buyer, Inc.  High Tech Industries  Term Loan  Loan  1M USD LIBOR+   4.00%   0.00%   4.21%   10/16/2026    1,484,887    1,484,887    1,477,046 

 

S-36

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Dealer Tire, LLC  Automotive  Term Loan B-1  Loan  1M USD LIBOR+   4.25%   0.00%   4.46%   12/12/2025    2,940,000    2,935,370    2,926,211 
Delek US Holdings, Inc.  Utilities: Oil & Gas  Term Loan B  Loan  1M USD LIBOR+   2.25%   0.00%   2.46%   3/31/2025    6,315,361    6,274,862    6,148,699 
DexKo Global, Inc. (Dragon Merger)  Automotive  Term Loan (9/21)  Loan  3M USD LIBOR+   3.75%   0.50%   4.25%   10/4/2028    840,000    836,119    828,450 
DexKo Global, Inc. (Dragon Merger) (a)  Automotive  Delayed Draw Term Loan (9/21)  Loan  3M USD LIBOR+   3.75%   0.50%   4.25%   10/4/2028    130,905    134,906    132,706 
Diamond Sports Group, LLC (b)  Media: Broadcasting & Subscription  Term Loan  Loan  Prime+   2.25%   0.00%   5.50%   8/24/2026    3,408,970    2,964,398    1,264,728 
DIRECTV FINANCING, LLC  Media: Broadcasting & Subscription  Term Loan  Loan  3M USD LIBOR+   5.00%   0.75%   5.75%   8/2/2027    3,910,000    3,874,543    3,896,823 
Dispatch Acquisition Holdings, LLC  Environmental Industries  Term Loan B (3/21)  Loan  3M USD LIBOR+   4.25%   0.75%   5.00%   3/25/2028    497,500    493,121    493,769 
DOMTAR CORPORATION  Forest Products & Paper  Term Loan 9/21  Loan  1M USD LIBOR+   5.50%   0.75%   6.25%   11/30/2028    840,645    832,557    837,140 
DRI HOLDING INC.  Media: Advertising, Printing & Publishing  Term Loan (12/21)  Loan  1M USD LIBOR+   5.25%   0.50%   5.75%   12/15/2028    3,000,000    2,970,701    2,944,500 
DRW Holdings, LLC  Banking, Finance, Insurance & Real Estate  Term Loan (2/21)  Loan  1M USD LIBOR+   3.75%   0.00%   3.96%   3/1/2028    6,500,000    6,454,552    6,467,500 
DTZ U.S. Borrower, LLC  Construction & Building  Term Loan  Loan  1M USD LIBOR+   2.75%   0.00%   2.96%   8/21/2025    3,876,012    3,865,362    3,838,880 
EAB Global, Inc.  Services: Business  Term Loan (08/21)  Loan  6M USD LIBOR+   3.50%   0.50%   4.00%   8/16/2028    1,000,000    995,320    989,250 
Echo Global Logistics, Inc.  Services: Business  Term Loan  Loan  1M USD LIBOR+   3.75%   0.50%   4.25%   11/23/2028    2,000,000    1,995,444    1,978,500 
Edelman Financial Group Inc., The  Banking, Finance, Insurance & Real Estate  Term Loan B (3/21)  Loan  1M USD LIBOR+   3.50%   0.75%   4.25%   4/7/2028    2,210,766    2,203,181    2,190,603 
Electrical Components Inter., Inc.  Capital Equipment  Term Loan (6/18)  Loan  1M USD LIBOR+   4.25%   0.00%   4.46%   6/26/2025    1,903,934    1,903,934    1,874,575 

 

S-37

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
ELECTRON BIDCO INC.  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD LIBOR+   3.25%   0.50%   3.75%   11/1/2028    500,000    497,610    494,455 
ELO Touch Solutions, Inc.  Media: Diversified & Production  Term Loan (12/18)  Loan  1M USD LIBOR+   6.50%   0.00%   6.71%   12/14/2025    2,341,935    2,266,272    2,334,137 
Embecta Corp  Healthcare & Pharmaceuticals  Term Loan B  Loan  3M USD SOFR+   3.00%   0.50%   3.50%   1/26/2029    750,000    746,250    742,688 
Endo Luxembourg Finance Company I S.a.r.l.  Healthcare & Pharmaceuticals  Term Loan (3/21)  Loan  3M USD LIBOR+   5.00%   0.75%   5.75%   3/27/2028    2,347,110    2,338,792    2,264,421 
Endure Digital, Inc.  High Tech Industries  Term Loan B  Loan  6M USD LIBOR+   3.50%   0.75%   4.25%   2/10/2028    2,487,500    2,476,721    2,394,219 
Enterprise Merger Sub Inc.  Healthcare & Pharmaceuticals  Term Loan B (06/18)  Loan  1M USD LIBOR+   3.75%   0.00%   3.96%   10/10/2025    4,850,000    4,844,205    3,516,638 
Equiniti Group PLC  Services: Business  Term Loan B  Loan  3M USD LIBOR+   4.50%   0.50%   5.00%   12/11/2028    500,000    495,392    497,085 
EyeCare Partners, LLC  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+   3.75%   0.00%   3.97%   2/18/2027    1,967,959    1,967,595    1,945,820 
Finco I LLC  Banking, Finance, Insurance & Real Estate  Term Loan B (9/20)  Loan  1M USD LIBOR+   2.50%   0.00%   2.71%   6/27/2025    3,793,978    3,787,136    3,743,708 
First Brands Group, LLC  Automotive  1st Lien Term Loan (3/21)  Loan  3M USD LIBOR+   5.00%   1.00%   6.00%   3/30/2027    4,962,500    4,891,260    4,925,281 
First Eagle Investment Management  Banking, Finance, Insurance & Real Estate  Refinancing Term Loan  Loan  3M USD LIBOR+   2.50%   0.00%   2.72%   2/1/2027    5,200,639    5,184,839    5,109,628 
First Student Bidco Inc.  Transportation: Consumer  Term Loan B  Loan  3M USD LIBOR+   3.00%   0.50%   3.50%   7/21/2028    730,392    725,495    719,663 
First Student Bidco Inc.  Transportation: Consumer  Term Loan C  Loan  3M USD LIBOR+   3.00%   0.50%   3.50%   7/21/2028    269,608    267,800    265,647 
Fitness International, LLC (LA Fitness)  Services: Consumer  Term Loan B (4/18)  Loan  3M USD LIBOR+   3.25%   1.00%   4.25%   4/18/2025    1,330,058    1,325,610    1,235,292 
FOCUS FINANCIAL PARTNERS, LLC  Banking, Finance, Insurance & Real Estate  Term Loan (1/20)  Loan  1M USD LIBOR+   2.00%   0.00%   2.21%   7/3/2024    494,872    494,493    488,122 

 

S-38

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Franchise Group, Inc.  Services: Consumer  First Out Term Loan  Loan  3M USD LIBOR+   4.75%   0.75%   5.50%   3/10/2026    815,445    808,696    813,406 
Franklin Square Holdings, L.P.  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   2.25%   0.00%   2.50%   8/1/2025    4,353,736    4,335,125    4,310,199 
Froneri International (R&R Ice Cream)  Beverage, Food & Tobacco  Term Loan B-2  Loan  1M USD LIBOR+   2.25%   0.00%   2.46%   1/29/2027    1,970,000    1,966,736    1,927,428 
Garrett LX III S.a r.l.  Automotive  Dollar Term Loan  Loan  3M USD LIBOR+   3.25%   0.50%   3.75%   4/28/2028    1,496,250    1,489,649    1,470,066 
Gemini HDPE LLC  Chemicals, Plastics, & Rubber  Term Loan B (12/20)  Loan  3M USD LIBOR+   3.00%   0.50%   3.50%   12/31/2027    2,392,656    2,376,261    2,370,715 
General Nutrition Centers, Inc. (d)  Retail  Second Lien Term Loan  Loan  1M USD LIBOR+   6.00%   0.00%   6.11%   10/7/2026    376,605    376,605    351,342 
Genesee & Wyoming, Inc.  Transportation: Cargo  Term Loan (11/19)  Loan  3M USD LIBOR+   2.00%   0.00%   2.22%   12/30/2026    1,473,750    1,468,685    1,451,305 
GEO Group, Inc., The  Banking, Finance, Insurance & Real Estate  Term Loan Refinance  Loan  1M USD LIBOR+   2.00%   0.75%   2.75%   3/22/2024    3,922,786    3,717,418    3,615,828 
GGP Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   2.50%   0.00%   2.71%   8/27/2025    3,775,280    3,197,869    3,684,031 
Gigamon Inc.  Services: Business  Term Loan B  Loan  6M USD LIBOR+   3.50%   0.75%   4.25%   12/27/2024    2,900,607    2,887,935    2,889,730 
Global Business Travel (GBT) III Inc.  Hotel, Gaming & Leisure  Term Loan  Loan  1M USD LIBOR+   2.50%   0.00%   2.71%   8/13/2025    4,353,750    4,353,165    4,065,314 
Global Tel*Link Corporation  Telecommunications  Term Loan B  Loan  1M USD LIBOR+   4.25%   0.00%   4.46%   11/29/2025    4,938,649    4,748,435    4,788,959 
Go Daddy Operating Company, LLC  High Tech Industries  Term Loan 2/21  Loan  1M USD LIBOR+   2.00%   0.00%   2.21%   8/10/2027    1,979,899    1,979,899    1,948,657 
Go Wireless Holdings, Inc.  Telecommunications  Term Loan  Loan  1M USD LIBOR+   6.50%   1.00%   7.50%   12/22/2024    2,846,753    2,824,354    2,828,961 
GOLDEN WEST PACKAGING GROUP LLC  Forest Products & Paper  Term Loan (11/21)  Loan  1M USD LIBOR+   5.25%   0.75%   6.00%   11/23/2027    2,000,000    1,980,672    1,980,000 

 

S-39

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Graham Packaging Co Inc  Containers, Packaging & Glass  Term Loan (2/21)  Loan  1M USD LIBOR+   3.00%   0.75%   3.75%   8/7/2027    972,314    966,607    961,647 
Great Outdoors Group, LLC  Retail  Term Loan B2  Loan  3M USD LIBOR+   3.75%   0.75%   4.50%   3/6/2028    990,019    985,574    984,079 
Greenhill & Co., Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   3.25%   0.00%   3.46%   4/12/2024    2,844,231    2,829,223    2,826,454 
Griffon Corporation  Consumer goods: Durable  Term Loan B  Loan  3M USD SOFR+   2.75%   0.50%   3.27%   1/24/2029    250,000    249,378    248,063 
Grosvenor Capital Management Holdings, LLLP  Banking, Finance, Insurance & Real Estate  Amendment 5 Term Loan  Loan  1M USD LIBOR+   2.50%   0.50%   3.00%   2/24/2028    3,870,741    3,867,368    3,845,581 
Harbor Freight Tools USA, Inc.  Retail  Term Loan B (06/21)  Loan  1M USD LIBOR+   2.75%   0.50%   3.25%   10/19/2027    3,473,618    3,452,200    3,414,393 
Harland Clarke Holdings Corp.  Media: Advertising, Printing & Publishing  Term Loan (08/21)  Loan  3M USD LIBOR+   7.75%   1.00%   8.75%   6/16/2026    1,262,555    1,260,655    1,121,149 
Helix Gen Funding, LLc  Energy: Electricity  Term Loan B (02/17)  Loan  1M USD LIBOR+   3.75%   1.00%   4.75%   6/3/2024    226,716    226,626    218,895 
Hillman Group Inc. (The) (New)  Consumer goods: Durable  Term Loan B-1 (2/21)  Loan  1M USD LIBOR+   2.75%   0.50%   3.25%   7/14/2028    3,514,399    3,506,291    3,471,101 
Hillman Group Inc. (The) (New) (a)  Consumer goods: Durable  Delayed Draw Term Loan (2/21)  Loan  1M USD LIBOR+   2.75%   0.50%   3.25%   7/14/2028    67,342    67,342    56,947 
HLF Financing SARL (Herbalife)  Consumer goods: Non-durable  Term Loan B (08/18)  Loan  1M USD LIBOR+   2.50%   0.00%   2.71%   8/18/2025    3,550,000    3,541,488    3,505,625 
Holley Purchaser, Inc  Automotive  Term Loan (11/21)  Loan  3M USD LIBOR+   3.75%   0.75%   4.50%   11/17/2028    2,137,500    2,127,187    2,117,899 
Holley Purchaser, Inc (a)  Automotive  Delayed Draw Term Loan  Loan  3M USD LIBOR+   3.75%   0.75%   4.50%   11/17/2028    106,875    106,875    103,602 
Howden Group Holdings  Banking, Finance, Insurance & Real Estate  Term Loan (1/21)  Loan  1M USD LIBOR+   3.25%   0.75%   4.00%   11/12/2027    2,174,152    2,164,312    2,148,192 
Hudson River Trading LLC  Banking, Finance, Insurance & Real Estate  Term Loan (3/21)  Loan  1M USD SOFR+   3.00%   0.00%   3.30%   3/17/2028    5,955,000    5,902,173    5,843,344 

 

S-40

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Idera, Inc.  High Tech Industries  Term Loan (02/21)  Loan  6M USD LIBOR+   3.75%   0.75%   4.50%   3/2/2028    4,860,079    4,848,914    4,811,478 
IMA Financial Group, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (10/21)  Loan  1M USD LIBOR+   3.75%   0.50%   4.25%   11/1/2028    2,000,000    1,990,546    1,973,760 
INDY US BIDCO, LLC  Services: Business  Term Loan (11/21)  Loan  1M USD LIBOR+   3.75%   0.00%   3.96%   3/6/2028    2,238,141    2,237,925    2,221,355 
INEOS US PETROCHEM LLC  Chemicals, Plastics, & Rubber  Term Loan (1/21)  Loan  1M USD LIBOR+   2.75%   0.50%   3.25%   1/29/2026    995,000    991,113    983,189 
Informatica Inc.  High Tech Industries  Term Loan B (10/21)  Loan  1M USD LIBOR+   2.75%   0.00%   3.00%   10/27/2028    500,000    499,441    493,440 
Ingram Micro Inc.  High Tech Industries  Term Loan  Loan  3M USD LIBOR+   3.50%   0.50%   4.00%   6/30/2028    1,492,500    1,478,709    1,483,172 
Inmar Acquisition Sub, Inc.  Services: Business  Term Loan B  Loan  3M USD LIBOR+   4.00%   1.00%   5.00%   5/1/2024    3,386,129    3,343,519    3,356,501 
Innophos, Inc.  Chemicals, Plastics, & Rubber  Term Loan B  Loan  1M USD LIBOR+   3.75%   0.00%   3.96%   2/4/2027    491,250    489,509    487,973 
INSTANT BRANDS HOLDINGS INC.  Consumer goods: Durable  Term Loan 4/21  Loan  3M USD LIBOR+   5.00%   0.75%   5.75%   4/7/2028    4,368,033    4,346,269    4,018,591 
INSTRUCTURE HOLDINGS, INC.  High Tech Industries  Term Loan B  Loan  3M USD LIBOR+   2.75%   0.50%   3.27%   10/21/2028    500,000    498,797    492,500 
Isagenix International, LLC  Beverage, Food & Tobacco  Term Loan  Loan  3M USD LIBOR+   5.75%   1.00%   6.75%   6/14/2025    2,427,552    2,401,608    1,775,900 
Ivory Merger Sub, Inc.  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD LIBOR+   3.50%   0.00%   3.67%   3/14/2025    2,949,539    2,931,462    2,870,285 
J Jill Group, Inc  Retail  Priming Term Loan  Loan  3M USD LIBOR+   5.00%   1.00%   6.00%   5/8/2024    1,574,907    1,573,650    1,409,542 
Jane Street Group  Banking, Finance, Insurance & Real Estate  Term Loan (1/21)  Loan  1M USD LIBOR+   2.75%   0.00%   2.96%   1/31/2028    3,960,000    3,954,873    3,906,778 

 

S-41

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Journey Personal Care Corp.  Consumer goods: Non-durable  Term Loan B  Loan  3M USD LIBOR+   4.25%   0.75%   5.00%   3/1/2028    995,000    990,570    945,250 
JP Intermediate B, LLC  Consumer goods: Non-durable  Term Loan  Loan  3M USD LIBOR+   5.50%   1.00%   6.50%   11/15/2025    4,154,019    4,125,538    3,620,933 
KAR Auction Services, Inc.  Automotive  Term Loan B (09/19)  Loan  1M USD LIBOR+   2.25%   0.00%   2.50%   9/19/2026    244,375    243,989    241,931 
Klockner-Pentaplast of America, Inc.  Containers, Packaging & Glass  Term Loan (1/21) (USD)  Loan  6M USD LIBOR+   4.75%   0.50%   5.55%   2/12/2026    1,488,750    1,482,629    1,391,981 
Kodiak BP, LLC  Construction & Building  Term Loan  Loan  3M USD LIBOR+   3.25%   0.75%   4.00%   3/13/2028    496,250    494,732    489,054 
KREF Holdings X LLC  Banking, Finance, Insurance & Real Estate  Term Loan (11/21)  Loan  3M USD LIBOR+   3.50%   0.50%   4.00%   9/1/2027    496,250    486,145    491,288 
Lakeland Tours, LLC (d)  Hotel, Gaming & Leisure  Priority Exit PIK Term Loan (9/20)  Loan  3M USD LIBOR+   6.00%   1.25%   7.25%   9/25/2023    299,904    288,132    300,054 
Lakeland Tours, LLC (d)  Hotel, Gaming & Leisure  2nd Out Take Back PIK Term Loan  Loan  3M USD LIBOR+   1.50%   1.25%   2.75%   9/25/2025    616,465    528,040    592,115 
Lakeland Tours, LLC (d)  Hotel, Gaming & Leisure  Third Out PIK Term Loan  Loan  3M USD LIBOR+   1.50%   1.25%   2.75%   9/25/2025    818,373    540,076    720,987 
Lakeland Tours, LLC (d)  Hotel, Gaming & Leisure  Holdco Fixed Term Loan  Loan  Fixed   0.00%   0.00%   13.25%   9/27/2027    869,977    228,303    594,847 
Lealand Finance Company B.V. (d)  Energy: Oil & Gas  Exit Term Loan  Loan  1M USD LIBOR+   1.00%   0.00%   1.21%   6/30/2025    334,753    334,753    155,422 
Learfield Communications, Inc  Media: Advertising, Printing & Publishing  Initial Term Loan (A-L Parent)  Loan  1M USD LIBOR+   3.25%   1.00%   4.25%   12/1/2023    475,000    474,352    449,616 
Lifetime Brands, Inc  Consumer goods: Non-durable  Term Loan B  Loan  1M USD LIBOR+   3.50%   1.00%   4.50%   2/28/2025    2,694,077    2,673,038    2,667,136 
Lightstone Generation LLC  Energy: Electricity  Term Loan B  Loan  3M USD LIBOR+   3.75%   1.00%   4.75%   1/30/2024    1,322,520    1,321,594    1,099,212 
Lightstone Generation LLC  Energy: Electricity  Term Loan C  Loan  3M USD LIBOR+   3.75%   1.00%   4.75%   1/30/2024    74,592    74,542    61,997 

 

S-42

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Liquid Tech Solutions Holdings, LLC  Services: Business  Term Loan  Loan  12M USD LIBOR+   4.75%   0.00%   5.50%   3/17/2028    995,000    991,612    991,269 
LogMeIn, Inc.  High Tech Industries  Term Loan (8/20)  Loan  1M USD LIBOR+   4.75%   0.00%   4.89%   8/31/2027    3,960,000    3,897,792    3,888,482 
LOYALTY VENTURES INC.  Services: Business  Term Loan B  Loan  1M USD LIBOR+   4.50%   0.50%   5.00%   11/3/2027    3,340,141    3,320,925    3,294,214 
LPL Holdings, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B1  Loan  1M USD LIBOR+   1.75%   0.00%   1.86%   11/11/2026    1,220,308    1,218,289    1,200,857 
LSF11 A5 HOLDCO LLC  Chemicals, Plastics, & Rubber  Term Loan  Loan  1M USD SOFR+   3.75%   0.50%   4.25%   10/16/2028    250,000    248,837    246,875 
MA FinanceCo LLC  High Tech Industries  Term Loan B4  Loan  3M USD LIBOR+   4.25%   1.00%   5.25%   6/5/2025    2,234,660    2,228,836    2,208,582 
MAGNITE, INC.  Services: Business  Term Loan  Loan  6M USD LIBOR+   5.00%   0.75%   5.75%   4/28/2028    1,990,000    1,935,905    1,980,050 
Marriott Ownership Resorts, Inc.  Hotel, Gaming & Leisure  Term Loan (11/19)  Loan  1M USD LIBOR+   1.75%   0.00%   1.96%   8/29/2025    1,317,074    1,317,074    1,290,403 
Match Group, Inc, The  Services: Consumer  Term Loan (1/20)  Loan  3M USD LIBOR+   1.75%   0.00%   2.22%   2/15/2027    250,000    249,562    244,895 
Mayfield Agency Borrower Inc. (FeeCo)  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   4.50%   0.00%   4.71%   2/28/2025    3,392,071    3,369,794    3,375,823 
McAfee, LLC  Services: Business  Term Loan B  Loan  Prime+   2.75%   0.00%   6.00%   9/30/2024    1,642,423    1,638,322    1,638,054 
McGraw-Hill Education, Inc.  Media: Advertising, Printing & Publishing  Term Loan (07/21)  Loan  3M USD LIBOR+   4.75%   0.50%   5.26%   7/28/2028    1,995,000    1,976,108    1,975,050 
MedAssets Software Inter Hldg, Inc.  High Tech Industries  Term Loan (11/21) (USD)  Loan  3M USD LIBOR+   4.00%   0.50%   4.50%   11/17/2028    500,000    492,500    496,250 
Mermaid Bidco Inc.  High Tech Industries  Term Loan B2  Loan  3M USD LIBOR+   3.75%   0.75%   4.50%   12/22/2027    993,756    990,577    976,366 
Messer Industries, LLC  Chemicals, Plastics, & Rubber  Term Loan B  Loan  3M USD LIBOR+   2.50%   0.00%   2.72%   3/1/2026    3,381,477    3,366,633    3,341,677 

 

S-43

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Michaels Companies Inc  Retail  Term Loan B (Magic Mergeco)  Loan  3M USD LIBOR+   4.25%   0.75%   5.00%   4/8/2028    2,492,500    2,474,302    2,312,492 
Milk Specialties Company  Beverage, Food & Tobacco  Term Loan (6/21)  Loan  3M USD LIBOR+   4.00%   1.00%   5.00%   8/15/2025    3,801,560    3,774,075    3,782,552 
MJH Healthcare Holdings, LLC  Healthcare & Pharmaceuticals  Term Loan B (01/22)  Loan  1M USD SOFR+   3.50%   0.50%   4.00%   1/28/2029    250,000    248,782    247,500 
MKS Instruments, Inc.  High Tech Industries  Term Loan B6  Loan  1M USD LIBOR+   1.75%   0.00%   1.96%   2/2/2026    868,529    863,296    862,562 
MRC Global Inc.  Metals & Mining  Term Loan B2  Loan  1M USD LIBOR+   3.00%   0.00%   3.21%   9/20/2024    351,484    351,116    348,848 
MW Industries, Inc. (Helix Acquisition Holdings)  Capital Equipment  Term Loan (2019 Incremental)  Loan  3M USD LIBOR+   3.75%   0.00%   3.97%   9/30/2024    2,842,097    2,812,930    2,765,730 
NAB Holdings, LLC (North American Bancard)  Banking, Finance, Insurance & Real Estate  Term Loan (11/21)  Loan  1M USD SOFR+   3.00%   0.50%   3.50%   11/17/2028    3,000,000    2,992,613    2,950,710 
Natgasoline LLC  Chemicals, Plastics, & Rubber  Term Loan  Loan  1M USD LIBOR+   3.50%   0.00%   3.75%   11/14/2025    3,472,277    3,448,686    3,411,513 
National Mentor Holdings, Inc.  Healthcare & Pharmaceuticals  Term Loan 2/21  Loan  1M USD LIBOR+   3.75%   0.75%   4.50%   3/2/2028    2,763,891    2,753,599    2,704,771 
National Mentor Holdings, Inc.  Healthcare & Pharmaceuticals  Term Loan C 2/21  Loan  3M USD LIBOR+   3.75%   0.75%   4.50%   3/2/2028    87,464    87,078    85,593 
National Mentor Holdings, Inc. (a)  Healthcare & Pharmaceuticals  Delayed Draw Term Loan 2/21  Loan  N/A    N/A      N/A      N/A     3/2/2028    -    -    (2,758)
Neenah, Inc.  Forest Products & Paper  Term Loan B (03/21)  Loan  3M USD LIBOR+   3.00%   0.50%   3.50%   4/6/2028    1,990,000    1,981,133    1,960,150 
NEW ERA CAP, LLC  Consumer goods: Durable  Term Loan (01/22)  Loan  6M USD LIBOR+   6.00%   0.75%   6.75%   7/13/2027    1,000,000    998,828    997,500 
Nexstar Broadcasting, Inc. (Mission Broadcasting)  Media: Broadcasting & Subscription  Term Loan  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%   9/18/2026    1,113,795    1,103,364    1,107,146 
Next Level Apparel, Inc.  Retail  Term Loan  Loan  3M USD WIBOR+   5.50%   1.00%   6.50%   8/9/2024    1,725,340    1,717,025    1,690,834 

 

S-44

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
NM Z Parent Inc (Zep Inc)  Chemicals, Plastics, & Rubber  Term Loan  Loan  12M USD LIBOR+   4.00%   1.00%   5.00%   8/9/2024    871,151    869,399    842,838 
NorthPole Newco S.a.r.l (b), (d)  Aerospace & Defense  Term Loan  Loan  3M USD LIBOR+   7.00%   0.00%   7.22%   3/3/2025    5,348,887    5,028,659    1,537,805 
NortonLifeLock Inc.  High Tech Industries  Term Loan B  Loan  3M USD SOFR+   2.00%   0.50%   2.50%   1/28/2029    1,500,000    1,492,500    1,480,620 
Novae LLC  Automotive  Term Loan B  Loan  1M USD SOFR+   5.00%   0.75%   5.75%   12/22/2028    1,555,556    1,540,210    1,540,000 
Novae LLC (a)  Automotive  Delayed Draw Term Loan  Loan  N/A    N/A      N/A      N/A     12/22/2028    -    -    (4,444)
Novolex Holdings, Inc (Flex Acquisition)  Containers, Packaging & Glass  Term Loan (02/21)  Loan  3M USD LIBOR+   3.50%   0.50%   4.00%   3/2/2028    987,555    983,296    983,437 
Nuvei Technologies Corp.  High Tech Industries  US Term Loan  Loan  1M USD LIBOR+   2.50%   0.50%   3.00%   9/29/2025    2,238,750    2,234,198    2,210,766 
Olaplex, Inc.  Consumer goods: Non-durable  Term Loan (2/22)  Loan  1M USD SOFR+   3.75%   0.50%   4.25%   2/23/2029    1,000,000    997,500    996,250 
Organon & Co.  Healthcare & Pharmaceuticals  Term Loan USD  Loan  6M USD LIBOR+   3.00%   0.50%   3.50%   6/2/2028    2,410,417    2,399,629    2,397,617 
Pacific Gas and Electric Company  Utilities: Electric  Term Loan  Loan  3M USD LIBOR+   3.00%   0.50%   3.50%   6/18/2025    1,479,969    1,474,197    1,449,999 
PACTIV EVERGREEN GROUP HOLDINGS INC.  Containers, Packaging & Glass  Term Loan B  Loan  1M USD LIBOR+   3.50%   0.50%   4.00%   9/20/2028    997,500    992,792    984,473 
Padagis LLC  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+   4.75%   0.50%   5.25%   7/6/2028    941,176    932,470    934,118 
Panther Guarantor II, L.P. (Forcepoint)  High Tech Industries  Term Loan 1/21  Loan  3M USD LIBOR+   4.50%   0.50%   5.00%   1/7/2028    497,500    494,346    493,520 
Pathway Partners Vet Management Company LLC  Services: Business  Term Loan  Loan  1M USD LIBOR+   3.75%   0.00%   3.96%   3/30/2027    491,473    482,640    486,804 
PCI Gaming Authority  Hotel, Gaming & Leisure  Term Loan  Loan  1M USD LIBOR+   2.50%   0.00%   2.71%   5/29/2026    809,038    806,361    800,188 

 

S-45

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
PEARLS (Netherlands) Bidco B.V.  Chemicals, Plastics, & Rubber  USD Term Loan (02/22)  Loan  3M USD SOFR+   4.00%   0.50%   4.50%   2/4/2029    1,000,000    997,500    989,580 
PECF USS INTERMEDIATE HOLDING III CORPORATION  Environmental Industries  Term Loan B  Loan  1M USD LIBOR+   4.25%   0.50%   4.75%   12/15/2028    100,000    99,777    99,391 
PEDIATRIC ASSOCIATES HOLDING COMPANY, LLC  Healthcare & Pharmaceuticals  Term Loan (12/22)  Loan  3M USD LIBOR+   3.50%   0.00%   3.84%   12/28/2028    1,302,632    1,296,159    1,291,234 
PEDIATRIC ASSOCIATES HOLDING COMPANY, LLC (a)  Healthcare & Pharmaceuticals  Delayed Draw Term Loan (12/21)  Loan  N/A    N/A      N/A      N/A     12/28/2028    -    -    (1,727)
Penn National Gaming  Hotel, Gaming & Leisure  Term Loan B-1  Loan  1M USD LIBOR+   2.25%   0.75%   3.00%   10/15/2025    1,762,675    1,715,292    1,746,370 
Peraton Corp.  Aerospace & Defense  Term Loan B  Loan  1M USD LIBOR+   3.75%   0.75%   4.50%   2/1/2028    5,459,994    5,439,162    5,425,869 
PHYSICIAN PARTNERS, LLC  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD SOFR+   4.00%   0.50%   4.50%   12/23/2028    2,000,000    1,980,245    1,985,000 
Ping Identity Corporation  High Tech Industries  Term Loan B (11/21)  Loan  6M USD SOFR+   3.75%   0.50%   4.45%   11/22/2028    1,000,000    995,074    990,000 
Pitney Bowes Inc  Services: Business  Term Loan B  Loan  1M USD LIBOR+   4.00%   0.00%   4.21%   3/17/2028    2,977,500    2,960,793    2,944,003 
Pixelle Specialty Solutions LLC  Forest Products & Paper  Term Loan  Loan  1M USD LIBOR+   6.50%   1.00%   7.50%   10/31/2024    3,535,026    3,515,981    3,504,837 
Plastipak Holdings Inc.  Containers, Packaging & Glass  Term Loan B (11/21)  Loan  1M USD LIBOR+   2.50%   0.50%   3.00%   11/17/2028    2,000,000    1,990,299    1,974,380 
Playtika Holding Corp.  High Tech Industries  Term Loan B (3/21)  Loan  1M USD LIBOR+   2.75%   0.00%   2.96%   3/13/2028    4,466,250    4,457,371    4,415,513 
PMHC II, INC.  Chemicals, Plastics, & Rubber  Term Loan (02/22)  Loan  3M USD SOFR+   4.25%   0.50%   4.75%   2/2/2029    2,000,000    1,990,000    1,968,340 
PointClickCare Technologies, Inc.  High Tech Industries  Term Loan B  Loan  6M USD LIBOR+   3.00%   0.75%   3.75%   12/29/2027    496,250    494,183    486,945 
Polymer Process Holdings, Inc.  Containers, Packaging & Glass  Term Loan  Loan  1M USD LIBOR+   4.75%   0.75%   5.50%   2/12/2028    5,458,750    5,404,639    5,333,635 

 

S-46

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Pre-Paid Legal Services, Inc.  Services: Consumer  Term Loan (12/21)  Loan  3M USD LIBOR+   3.75%   0.50%   4.25%   12/15/2028    3,000,000    2,975,633    2,973,000 
Presidio, Inc.  Services: Business  Term Loan B (1/20)  Loan  1M USD LIBOR+   3.50%   0.00%   3.71%   1/22/2027    492,500    491,700    488,038 
Prime Security Services Borrower, LLC (ADT)  Services: Consumer  Term Loan (1/21)  Loan  6M USD LIBOR+   2.75%   0.75%   3.50%   9/23/2026    3,556,300    3,553,818    3,513,837 
PRIORITY HOLDINGS, LLC  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   5.75%   1.00%   6.75%   4/27/2027    2,985,000    2,957,411    2,973,806 
PriSo Acquisition Corporation  Construction & Building  Term Loan (01/21)  Loan  3M USD LIBOR+   3.25%   0.75%   4.00%   12/28/2027    496,248    494,100    487,832 
Project Leopard Holdings Inc  High Tech Industries  Term Loan  Loan  6M USD LIBOR+   4.75%   1.00%   5.75%   7/5/2024    495,000    494,242    492,678 
Prometric Inc. (Sarbacane Bidco)  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   3.00%   1.00%   4.00%   1/29/2025    481,388    480,315    474,017 
PUG LLC  Services: Consumer  Term Loan B (02/20)  Loan  1M USD LIBOR+   3.50%   0.00%   3.71%   2/12/2027    485,075    483,298    475,374 
QUEST BORROWER LIMITED  High Tech Industries  Term Loan (1/22)  Loan  3M USD SOFR+   4.25%   0.50%   4.75%   1/19/2029    2,000,000    1,980,237    1,968,760 
Rackspace Technology Global, Inc.  High Tech Industries  Term Loan (1/21)  Loan  1M USD LIBOR+   2.75%   0.75%   3.50%   2/15/2028    496,250    494,141    480,519 
RealPage, Inc.  High Tech Industries  Term Loan (04/21)  Loan  1M USD LIBOR+   3.25%   0.50%   3.75%   4/24/2028    997,500    995,328    985,720 
Renaissance Learning, Inc.  Services: Consumer  Term Loan (5/18)  Loan  1M USD LIBOR+   3.25%   0.00%   3.46%   5/30/2025    2,969,141    2,946,381    2,922,496 
Rent-A-Center, Inc.  Retail  Term Loan B2 (9/21)  Loan  1M USD LIBOR+   3.25%   0.50%   3.81%   2/17/2028    993,744    991,647    973,869 
Research Now Group, Inc  Media: Advertising, Printing & Publishing  Term Loan  Loan  6M USD LIBOR+   5.50%   1.00%   6.50%   12/20/2024    4,343,378    4,268,021    4,251,082 
Resideo Funding Inc.  Services: Consumer  Term Loan (1/21)  Loan  1M USD LIBOR+   2.25%   0.50%   2.75%   2/11/2028    1,488,750    1,486,251    1,481,306 

 

S-47

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Resolute Investment Managers (American Beacon), Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (10/20)  Loan  3M USD LIBOR+   4.25%   1.00%   5.25%   4/30/2024    3,084,702    3,078,180    3,067,366 
Restoration Hardware, Inc.  Retail  Term Loan (9/21)  Loan  3M USD LIBOR+   2.50%   0.50%   3.00%   10/20/2028    3,497,500    3,489,704    3,456,509 
Reynolds Consumer Products LLC  Containers, Packaging & Glass  Term Loan  Loan  1M USD LIBOR+   1.75%   0.00%   1.96%   1/29/2027    1,291,932    1,290,988    1,271,829 
Reynolds Group Holdings Inc.  Metals & Mining  Term Loan B2  Loan  1M USD LIBOR+   3.25%   0.00%   3.46%   2/5/2026    3,465,000    3,449,546    3,406,545 
Robertshaw US Holding Corp.  Consumer goods: Durable  Term Loan B  Loan  6M USD LIBOR+   3.50%   1.00%   4.50%   2/28/2025    962,500    961,492    877,800 
Rocket Software, Inc.  High Tech Industries  Term Loan (11/18)  Loan  1M USD LIBOR+   4.25%   0.00%   4.46%   11/28/2025    2,905,190    2,897,593    2,876,138 
Russell Investments US Inst’l Holdco, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (10/20)  Loan  6M USD LIBOR+   3.50%   1.00%   4.50%   6/2/2025    5,637,965    5,601,072    5,592,185 
RV Retailer LLC  Automotive  Term Loan  Loan  3M USD SOFR+   3.75%   0.75%   4.50%   2/8/2028    1,985,000    1,967,852    1,951,513 
Ryan Specialty Group LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   3.00%   0.75%   3.75%   9/1/2027    493,750    487,862    489,583 
S&S HOLDINGS LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+   5.00%   0.50%   5.50%   3/10/2028    2,483,744    2,427,454    2,458,906 
Sally Holdings LLC  Retail  Term Loan B  Loan  1M USD LIBOR+   2.25%   0.00%   2.46%   7/5/2024    748,409    746,932    740,925 
Samsonite International S.A.  Consumer goods: Non-durable  Term Loan B2  Loan  1M USD LIBOR+   3.00%   0.75%   3.75%   4/25/2025    987,538    967,436    979,519 
Schweitzer-Mauduit International, Inc.  High Tech Industries  Term Loan B  Loan  1M USD LIBOR+   3.75%   0.75%   4.50%   4/20/2028    2,985,000    2,969,212    2,895,450 
Scientific Games Holdings LP  Hotel, Gaming & Leisure  Term Loan B  Loan  3M USD SOFR+   3.50%   0.50%   4.00%   2/3/2029    500,000    498,750    496,460 
SETANTA AIRCRAFT LEASING DAC  Aerospace & Defense  Term Loan  Loan  3M USD LIBOR+   2.00%   0.00%   2.14%   11/2/2028    1,000,000    997,653    993,440 

 

S-48

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/

LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Signify Health, LLC  Healthcare & Pharmaceuticals  Term Loan B (6/21)  Loan  3M USD LIBOR+   3.25%   0.50%   3.75%   6/16/2028    498,750    496,482    492,206 
Sitel Worldwide Corporation  Services: Business  USD Term Loan (7/21)  Loan  3M USD LIBOR+   3.75%   0.50%   4.25%   8/28/2028    1,995,000    1,985,688    1,981,294 
SiteOne Landscape Supply, LLC  Services: Business  Term Loan (3/21)  Loan  3M USD LIBOR+   2.00%   0.50%   2.50%   3/18/2028    785,769    784,048    780,528 
SMG US Midco 2, Inc.  Services: Business  Term Loan (01/20)  Loan  3M USD LIBOR+   2.50%   0.00%   2.80%   1/23/2025    490,000    490,000    472,238 
Sotheby’s  Services: Business  Term Loan (7/21)  Loan  3M USD LIBOR+   4.50%   0.50%   5.00%   1/15/2027    3,256,472    3,207,096    3,240,190 
Sparta U.S. HoldCo LLC  Chemicals, Plastics, & Rubber  Term Loan (04/21)  Loan  1M USD LIBOR+   3.50%   0.75%   4.25%   8/2/2028    2,000,000    1,990,687    1,985,000 
Specialty Pharma III Inc.  Services: Business  Term Loan  Loan  1M USD LIBOR+   4.50%   0.75%   5.25%   3/31/2028    1,995,000    1,977,135    1,975,050 
Spectrum Brands, Inc.  Consumer goods: Durable  Term Loan (2/21)  Loan  3M USD LIBOR+   2.00%   0.50%   2.50%   3/3/2028    496,250    495,145    494,389 
Spin Holdco, Inc.  Services: Consumer  Term Loan 3/21  Loan  3M USD LIBOR+   4.00%   0.75%   4.75%   3/4/2028    2,977,500    2,962,439    2,958,474 
SRAM, LLC  Consumer goods: Durable  Term Loan (05/21)  Loan  1M USD LIBOR+   2.75%   0.50%   3.26%   5/12/2028    3,600,000    3,594,517    3,571,488 
SS&C Technologies, Inc.  Services: Business  Term Loan B3  Loan  1M USD LIBOR+   1.75%   0.00%   1.96%   4/16/2025    190,170    189,956    186,819 
SS&C Technologies, Inc.  Services: Business  Term Loan B4  Loan  1M USD LIBOR+   1.75%   0.00%   1.96%   4/16/2025    154,375    154,203    151,655 
SS&C Technologies, Inc.  Services: Business  Term Loan B-5  Loan  1M USD LIBOR+   1.75%   0.00%   1.96%   4/16/2025    477,615    477,001    469,376 
STANDARD INDUSTRIES INC.  Construction & Building  Term Loan B  Loan  3M USD LIBOR+   2.50%   0.50%   3.00%   9/22/2028    640,250    634,225    637,503 
Staples, Inc.  Wholesale  Term Loan (03/19)  Loan  3M USD LIBOR+   5.00%   0.00%   5.13%   4/16/2026    4,386,462    4,265,782    4,154,813 

 

S-49

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
  

SOFR/
LIBOR
Floor

   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Stars Group Inc. (The)  Hotel, Gaming & Leisure  Term Loan  Loan  3M USD LIBOR+   2.25%   0.00%   2.47%   7/21/2026    1,995,000    1,990,864    1,972,776 
Storable, Inc  High Tech Industries  Term Loan B  Loan  6M USD LIBOR+   3.25%   0.50%   3.75%   4/17/2028    500,000    498,861    494,375 
Superannuation & Investments US LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   3.75%   0.50%   4.25%   12/1/2028    1,000,000    990,274    995,940 
Sylvamo Corporation  Forest Products & Paper  Term Loan  Loan  1M USD LIBOR+   4.50%   0.50%   5.00%   8/18/2028    1,093,333    1,082,992    1,085,133 
Syncsort Incorporated  High Tech Industries  Term Loan B (10/21)  Loan  3M USD LIBOR+   4.00%   0.75%   4.75%   4/24/2028    2,495,000    2,493,770    2,465,684 
Syniverse Holdings, Inc.  Telecommunications  Term Loan  Loan  3M USD SOFR+   4.25%   0.50%   4.75%   2/1/2029    500,000    495,000    499,375 
Tenable Holdings, Inc.  Services: Business  Term Loan B (6/21)  Loan  6M USD LIBOR+   2.75%   0.50%   3.27%   7/7/2028    1,000,000    997,633    986,250 
Teneo Holdings LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD SOFR+   5.25%   1.00%   6.25%   7/15/2025    4,428,522    4,355,261    4,383,129 
Tenneco Inc  Capital Equipment  Term Loan B  Loan  1M USD LIBOR+   3.00%   0.00%   3.21%   10/1/2025    1,455,000    1,447,215    1,444,088 
Ten-X, LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   4.00%   1.00%   5.00%   9/27/2024    1,920,000    1,918,652    1,881,600 
The Dun & Bradstreet Corporation  Services: Business  Term Loan  Loan  1M USD LIBOR+   3.25%   0.00%   3.46%   2/6/2026    1,000,000    998,750    988,330 
The Dun & Bradstreet Corporation  Services: Business  Term Loan B  Loan  1M USD SOFR+   3.25%   0.00%   3.44%   1/5/2029    250,000    248,180    246,668 
THE KNOT WORLDWIDE INC.  Services: Consumer  Term Loan (1/22)  Loan  1M USD SOFR+   4.50%   0.00%   4.67%   12/19/2025    4,869,796    4,863,346    4,829,231 
The Octave Music Group, Inc (Touchtunes)  Services: Business  Term Loan B  Loan  1M USD LIBOR+   6.00%   1.00%   7.00%   5/29/2025    2,893,526    2,872,208    2,871,824 
Thor Industries, Inc.  Automotive  USD Term Loan (3/21)  Loan  1M USD LIBOR+   3.00%   0.00%   3.25%   2/1/2026    2,810,435    2,763,310    2,797,563 

 

S-50

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Tosca Services, LLC  Containers, Packaging & Glass  Term Loan (2/21)  Loan  1M USD LIBOR+   3.50%   0.75%   4.25%   8/18/2027    495,000    489,079    487,575 
Trans Union LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   2.00%   0.50%   2.50%   12/1/2028    870,968    868,877    860,804 
Transdigm, Inc.  Aerospace & Defense  Term Loan G (02/20)  Loan  1M USD LIBOR+   2.25%   0.00%   2.46%   8/22/2024    4,024,167    4,026,414    3,959,700 
Travel Leaders Group, LLC  Hotel, Gaming & Leisure  Term Loan B (08/18)  Loan  1M USD LIBOR+   4.00%   0.00%   4.21%   1/25/2024    2,412,500    2,411,191    2,268,353 
TRITON WATER HOLDINGS, INC.  Beverage, Food & Tobacco  Term Loan (03/21)  Loan  3M USD LIBOR+   3.50%   0.50%   4.00%   3/31/2028    1,492,500    1,485,884    1,454,352 
Tronox Pigments (Netherlands) B.V.  Chemicals, Plastics, & Rubber  Term Loan  Loan  3M USD LIBOR+   2.25%   0.00%   2.47%   3/10/2028    346,923    346,183    341,719 
TruGreen Limited Partnership  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   4.00%   0.75%   4.75%   10/29/2027    964,241    957,748    961,830 
Uber Technologies, Inc.  Transportation: Consumer  Term Loan B (2/21)  Loan  1M USD LIBOR+   3.50%   0.00%   3.71%   2/25/2027    3,947,943    3,909,627    3,905,740 
Ultra Clean Holdings, Inc.  High Tech Industries  Incremental Term Loan 3/21  Loan  1M USD LIBOR+   3.75%   0.00%   3.96%   8/27/2025    884,205    880,505    882,366 
Unimin Corporation  Metals & Mining  Term Loan (12/20)  Loan  3M USD LIBOR+   4.00%   1.00%   5.00%   7/31/2026    496,815    471,432    490,853 
United Natural Foods, Inc  Beverage, Food & Tobacco  Term Loan B  Loan  1M USD LIBOR+   3.25%   0.00%   3.46%   10/22/2025    1,624,974    1,562,482    1,616,166 
United Road Services Inc.  Transportation: Cargo  Term Loan (10/17)  Loan  6M USD LIBOR+   5.75%   1.00%   6.75%   9/1/2024    920,843    915,490    826,457 
Univar Inc.  Chemicals, Plastics, & Rubber  Term Loan B6  Loan  1M USD LIBOR+   2.00%   0.00%   2.21%   6/2/2028    1,990,000    1,980,782    1,974,458 
Univision Communications Inc.  Media: Broadcasting & Subscription  Term Loan B (6/21)  Loan  1M USD LIBOR+   3.25%   0.75%   4.00%   3/15/2026    2,471,487    2,464,765    2,451,913 
US Ecology, Inc.  Environmental Industries  Term Loan B  Loan  1M USD LIBOR+   2.50%   0.00%   2.71%   11/2/2026    490,000    489,302    488,040 

 

S-51

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
Utz Quality Foods, LLC  Beverage, Food & Tobacco  Term Loan B  Loan  1M USD LIBOR+   3.00%   0.00%   3.21%   1/20/2028    1,847,121    1,844,606    1,827,264 
Vaco Holdings, LLC  Services: Business  Term Loan (01/22)  Loan  1M USD SOFR+   5.00%   0.75%   5.75%   1/19/2029    250,000    248,777    248,124 
Verifone Systems, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (7/18)  Loan  3M USD LIBOR+   4.00%   0.00%   4.50%   8/20/2025    1,382,319    1,377,042    1,354,672 
Vertex Aerospace Services Corp  Aerospace & Defense  Term Loan (10/21)  Loan  1M USD LIBOR+   4.00%   0.75%   4.75%   12/6/2028    1,000,000    995,345    992,080 
VFH Parent LLC  Banking, Finance, Insurance & Real Estate  Term Loan (01/22)  Loan  Daily SOFR+   3.00%   0.50%   3.50%   1/12/2029    3,100,888    3,092,414    3,071,833 
Virtus Investment Partners, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B (9/21)  Loan  1M USD LIBOR+   2.25%   0.00%   2.36%   9/28/2028    2,992,500    2,982,995    2,971,942 
Vistra Energy Corp  Utilities: Electric  2018 Incremental Term Loan  Loan  1M USD LIBOR+   1.75%   0.00%   1.87%   12/31/2025    907,176    906,677    890,075 
Vizient, Inc  Healthcare & Pharmaceuticals  Term Loan B-6  Loan  1M USD LIBOR+   2.00%   0.00%   2.21%   5/6/2026    486,250    485,567    480,779 
VM Consolidated, Inc.  Construction & Building  Term Loan B (3/21)  Loan  6M USD LIBOR+   3.25%   0.00%   3.60%   3/19/2028    2,339,327    2,336,223    2,322,951 
Vouvray US Finance LLC  High Tech Industries  Term Loan  Loan  1M USD LIBOR+   3.00%   1.00%   4.00%   3/11/2024    476,250    476,250    411,837 
Warner Music Group Corp. (WMG Acquisition Corp.)  Hotel, Gaming & Leisure  Term Loan G  Loan  1M USD LIBOR+   2.13%   0.00%   2.33%   1/20/2028    1,250,000    1,249,760    1,234,763 
Wastequip, LLC (HPCC Merger/Patriot Container)  Environmental Industries  Term Loan (3/18)  Loan  1M USD LIBOR+   3.75%   1.00%   4.75%   3/15/2025    489,822    488,550    469,004 
Watlow Electric Manufacturing Company  High Tech Industries  Term Loan B  Loan  3M USD LIBOR+   3.75%   0.50%   4.25%   3/2/2028    2,481,250    2,470,270    2,452,294 
West Corporation  Telecommunications  Term Loan B (Olympus Merger)  Loan  3M USD LIBOR+   4.00%   1.00%   5.00%   10/10/2024    1,086,078    1,047,433    967,424 
West Corporation  Telecommunications  Term Loan B  Loan  3M USD LIBOR+   3.50%   1.00%   4.50%   10/10/2024    2,599,274    2,562,059    2,301,449 

 

S-52

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

Issuer Name  Industry  Asset
Name
  Asset
Type
  Reference
Rate/Spread
   SOFR/
LIBOR
Floor
   Current
Rate
(All In)
   Maturity
Date
   Principal/
Number
of Shares
   Cost   Fair
Value
 
WEX Inc.  Services: Business  Term Loan B (3/21)  Loan  1M USD LIBOR+   2.25%   0.00%   2.46%   3/31/2028    2,985,000    2,974,005    2,937,419 
WildBrain Ltd.  Media: Diversified & Production  Term Loan  Loan  1M USD LIBOR+   4.25%   0.75%   5.00%   3/27/2028    1,985,000    1,949,907    1,966,401 
WP CITYMD BIDCO LLC  Services: Consumer  Term Loan B  Loan  6M USD LIBOR+   3.25%   0.50%   3.75%   12/22/2028    7,424,013    7,399,065    7,355,340 
Xperi Corporation  High Tech Industries  Term Loan  Loan  1M USD LIBOR+   3.50%   0.00%   3.71%   6/8/2028    2,741,617    2,730,066    2,719,355 
ZEBRA BUYER LLC  Banking, Finance, Insurance & Real Estate  Term Loan 4/21  Loan  3M USD LIBOR+   3.25%   0.50%   3.75%   11/1/2028    887,097    883,013    882,661 
Zekelman Industries, Inc.  Metals & Mining  Term Loan (01/20)  Loan  1M USD LIBOR+   2.00%   0.00%   2.14%   1/25/2027    968,914    968,914    954,622 
Zodiac Pool Solutions  Consumer goods: Durable  Term Loan (1/22)  Loan  1M USD SOFR+   2.00%   0.50%   2.50%   1/19/2029    500,000    498,783    493,440 
                                                
                                        $653,022,265   $638,963,350 

 

S-53

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2022

 

   Number of Shares   Cost   Fair Value 
Cash and cash equivalents               
U.S. Bank Money Market (c)   6,171,793   $6,171,793   $6,171,793 
Total cash and cash equivalents   6,171,793   $6,171,793   $6,171,793 

 

(a) All or a portion of this investment has an unfunded commitment as of February 28, 2022
(b) As of February 28, 2022, 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 28, 2022.
(d) Investments include Payment-in-Kind Interest. 

 

LIBOR—London Interbank Offered Rate

SOFR - Secured Overnight Financing Rate

WIBOR - Warsaw Interbank Offered Rate

 

1M USD LIBOR—The 1 month USD LIBOR rate as of February 28, 2022 was 0.23%.

2M USD LIBOR—The 2 month USD LIBOR rate as of February 28, 2022 was 0.50%.

3M USD LIBOR—The 3 month USD LIBOR rate as of February 28, 2022 was 0.51%.

6M USD LIBOR—The 6 month USD LIBOR rate as of February 28, 2022 was 0.80%.

12M USD LIBOR - The 12 month USD LIBOR rate as of February 28, 2022 was 1.28%.

3 PL WIBOR - The 3 month PL WIBOR rate as of February 28, 2022 was 3.65%.

Daily SOFR- The daily SOFR rate as of February 28, 2022 was 0.05%.

1M SOFR - The 1 month SOFR rate as of February 28, 2022 was 0.05%.

3M SOFR - The 3 month SOFR rate as of February 28, 2022 was 0.04%.

Prime—The Prime Rate as of February 28, 2022 was 3.25%.

 

See accompanying notes to financial statements.

 

S-54

 

 

SARATOGA INVESTMENT CORP. CLO 2013-1, LTD.

 

NOTES TO FINANCIAL STATEMENTS

 

1. Organization and Purpose

 

Saratoga Investment Corp. CLO 2013-1, Ltd. (the “Issuer”, “we”, “our”, “us”, “CLO” or “Saratoga CLO”), an exempted company with limited liability incorporated under the laws of the Cayman Islands was formed on November 28, 2007 and commenced operations on January 22, 2008. The Issuer was established to acquire or participate in U.S. dollar-denominated corporate debt obligations. The “Company” refers to Saratoga Investment Corp.

 

On January 22, 2008, the Issuer issued $400.0 million of notes, consisting of Class A Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes (collectively the “Secured Notes”), and Subordinated Notes. The notes were issued pursuant to an indenture, dated January 22, 2008 (the “Indenture”), with U.S. Bank National Association (the “Trustee”) servicing as the Trustee thereunder.

 

On October 17, 2013, in a refinancing transaction, the Issuer issued $284.9 million of notes (the “2013-1 CLO Notes”), consisting of Class X Floating Rate Senior Notes, Class A-1 Floating Rate Senior Notes, Class A-2 Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes, and Class F Deferrable Floating Rate Notes. The 2013-1 CLO Notes were issued pursuant to the Indenture with the same Trustee. Proceeds of the issuance of the 2013-1 CLO Notes were used, along with existing assets held by the Trustee, to redeem all of the Secured Notes issued in 2008.

 

On November 15, 2016, the Issuer completed the second refinancing and the Issuer issued $282.4 million of notes (the “2013-1 Amended CLO Notes”), consisting of Class A-1 Floating Rate Senior Notes, Class A-2 Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes, and Class F Deferrable Floating Rate Notes. The 2013-1 Amended CLO Notes were issued pursuant to the Indenture with the same Trustee. Proceeds of the issuance of the 2013-1 Amended CLO Notes were used, along with existing assets held by the Trustee, to redeem all of the 2013-1 CLO Notes issued in 2013.

 

On December 14, 2018, in a refinancing transaction, the Issuer issued $509.5 million of notes (the “2013-1 Reset CLO Notes”), consisting of Class A-1FL-R-2 Floating Rate Senior Notes, Class A-1FXD-R-2 Fixed Rate Senior Notes, Class A-2-R-2 Floating Rate Senior Notes, Class B-R-2 Floating Rate Senior Notes, Class C-R-2 Deferrable Mezzanine Floating Rate Notes, Class D-R-2 Deferrable Mezzanine Floating Rate Notes, Class E-1-R-2 Deferrable Mezzanine Floating Rate Notes, Class F-R-2 Deferrable Junior Floating Rate Notes, Class G-R-2 Deferrable Junior Floating Rate Notes, and Subordinated Notes. The 2013-1 Reset CLO Notes were issued pursuant to the Indenture with the same Trustee. Proceeds of the issuance of the 2013-1 Reset CLO Notes were used along with existing assets held by the Trustee to redeem all of the Secured Notes issued in 2016.

 

On February 26, 2021, the Company completed the fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024, and extended its legal maturity to April 2033. A non-call period ending February 2022 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. At February 28, 2022, the outstanding receivable of $2.6 million was repaid in full.

 

S-55

 

 

On August 9, 2021, the Company exchanged its existing $17.9 million Class F-R-3 Notes for $8.5 million Class F-1-R-3 Notes and $9.4 million Class F-2-R-3 Notes at par as a non cash transaction.

 

Pursuant to an investment management agreement (the “Investment Management Agreement”), Saratoga Investment Corp. (the “Investment Manager”), provides investment management services to the Issuer, and makes day-to-day investment decisions concerning the assets of the Issuer. The Investment Manager also performs certain administrative services on behalf of the Issuer under the Investment Management Agreement. The CLO remains 100.0% owned and managed by Saratoga Investment Corp.

 

2. Significant Accounting Policies

 

Basis of Presentation

 

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and are stated in U.S. dollars. The following is a summary of the significant accounting policies followed by the Issuer in the preparation of its financial statements.

 

The Issuer is considered to be an investment company for financial reporting purposes and has applied the guidance in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services—Investment Companies. There has been no change to the Issuer’s status as an investment company during the year ended February 28, 2023.

 

Use of Estimates

 

The preparation of the financial statements in conformity with U.S. GAAP requires the Investment Manager to make estimates and assumptions that affect the amounts of assets and liabilities reported and disclosed at the date of the financial statements, including the fair value of investments, and the amounts of income and expenses during the reporting period. Actual results could differ from these estimates and such differences could be material.

 

Cash and Cash Equivalents

 

The Issuer defines cash and cash equivalents as highly-liquid financial instruments with original maturities of three months or less. Cash and cash equivalents may include investments in money market mutual funds, which are carried at fair value. At February 28, 2023 and February 28, 2022, cash and cash equivalents amounted to $23.8 million and $6.2 million, respectively, and are swept on an overnight basis into a U.S. Bank money market deposit account held at the Trustee.

 

Valuation of Investments

 

The Issuer 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 Issuer to assume that its investments are to be sold at the statement of assets and liabilities 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 the Investment Manager to approve a fair value determination to reflect significant events affecting the value of these investments. The Investment Manager values investments for which market quotations are not readily available at fair value. Determinations of fair value may involve significant judgments and estimates. The types of factors that may be considered in determining the fair value of 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.

 

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. Our 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 are ultimately realized upon the disposal of such investments.

 

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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 Issuer 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 amortizations of premium 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 the Investment Manager’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest are 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. At February 28, 2023 our investments in three portfolio companies were on non-accrual status with a fair value of approximately $2.4 million, or 0.4% of the fair value of our portfolio. We have established a reserve of $0.2 million against interest receivable related to these portfolio companies. 

 

Payment-in-Kind Interest

 

The Issuer holds debt 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. For the years ended February 28, 2023, February 28, 2022 and February 28, 2021 we recorded $0.2 million, $0.6 million and $0.3 in PIK interest.

 

Deferred Debt Financing Costs, net

 

The Issuer 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.

 

As of February 29, 2020, included in deferred debt financing costs of $2.3 million, are structuring fees of the investment bank, rating agency and legal fees, and other various closing costs associated with the issuance of the 2013-1 Reset CLO Notes on December 14, 2018. Such costs have been capitalized and amortized using an effective yield method, as appropriate, over the life of the related notes.

 

New debt financing costs of $2.3 million were incurred with the issuance of the 2013-1 2021 Reset CLO Notes on February 26, 2021. These costs consist of structuring fees of the investment bank, rating agency and legal fees, and other various closing costs. Of that amount, $1.8 million has been capitalized and amortized using an effective yield method, as appropriate, over the life of the related notes.

 

Unamortized deferred debt financing costs of $1.6 million incurred in connection with the issuance of the 2013- 1 Reset CLO Notes were expensed when the 2013-1 Reset CLO Notes were extinguished on February 26, 2021 and included in Realized loss on extinguishment of debt.

 

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Management Fees

 

The Issuer is externally managed by the Investment Manager pursuant to the Investment Management Agreement. As compensation for the performance of its obligations under the Investment Management Agreement, the Investment Manager is entitled to receive from the Issuer a base management fee (the “Base Management Fee”), a subordinated management fee (the “Subordinated Management Fee”) and an incentive management fee (the “Incentive Management Fee”). The Base Management Fee is payable in arrears quarterly (subject to availability of funds and to the satisfaction of payment obligations on the debt obligations of the Issuer (the “Priority of Payments”)) and prior to the second refinancing and the issuance of the 2013-1 Amended CLO Notes, was payable in an amount equal to 0.25% per annum of the fee basis amount at the beginning of the Collection Period. The Subordinated Management Fee is payable in arrears quarterly (subject to availability of funds and to the Priority of Payments) and prior to the second refinancing and the issuance of the 2013-1 Amended CLO Notes, was payable in an amount equal to 0.25% per annum of the fee basis amount at the beginning of the Collection Period. Subsequent to the second refinancing and the issuance of the 2013-1 Amended CLO Notes, the Base Management Fee was changed to be payable in an amount equal to 0.10% per annum of the fee basis amount at the beginning of the Collection Period, and the Subordinated Management Fees was changed to be payable in an amount equal to 0.40% per annum of the fee basis amount at the beginning of the Collection Period. This remained unchanged during the third refinancing and the issuance of the 2013-1 Reset CLO Notes, as well as the fourth refinancing and issuance of the 2013-1 2021 Reset CLO Notes.

 

Prior to the third refinancing of the CLO, the Incentive Management Fee equaled 20.0% of the remaining interest proceeds and principal proceeds, if any, after the Subordinated Notes have realized the Incentive Management Fee target return of 12.0%, in accordance with the Priority of Payments after making the prior distributions on the relevant payment date. The Investment Manager is no longer eligible to receive the Incentive Management Fee following the third refinancing of the CLO on December 14, 2018.

 

Expenses

 

The Issuer bears its own organizational and offering expenses, all expenses related to its investment program and expenses incurred in connection with its operations including, but not limited to, external legal, administrative, trustee, accounting, tax and audit expenses, costs related to trading, acquiring, monitoring or disposing of investments of the Issuer, and interest and other borrowing expenses, expenses of preparing and distributing reports, financial statements, and litigation or other extraordinary expenses. The Issuer has retained the Trustee to provide trustee services. Additionally, the Trustee performs loan administration, debt covenant compliance calculations, and monitoring and reporting services. For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, the Issuer paid $0.3 million, $0.3 million and $0.2 million, respectively, for trustee services provided and is included on the statements of operations.

 

Interest Expense

 

The Issuer has issued rated and unrated notes to finance its operations. Interest on debt is calculated by the Trustee for the Issuer. Interest is accrued and generally paid quarterly. For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, $4.9 million, $5.2 million and $7.9 million of payments to the Subordinated Notes were included in interest and debt financing expenses on the statements of operations, respectively. For the years ended February 28, 2023 and February 28, 2022 and February 28, 2021, $4.4 million, $4.4 million and $3.2 million, respectively, in discount amortization related to the Subordinated Notes is also included in interest and debt financing expenses on the Issuer’s statements of operations.

 

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Risk Management

 

In the ordinary course of its business, the Issuer 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.

 

Credit risk is the risk of default or non-performance by portfolio companies, equivalent to the investment’s carrying amount.

 

The Issuer 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.

 

The Issuer 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.

 

New Accounting Pronouncements

 

In June 2022, the FASB issued Accounting Standards Update (“ASU”) No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (Topic 820), which clarifies that a contractual sale restriction prohibiting the sale of an equity security is a characteristic of the reporting entity holding the equity security and is not included in the equity security’s unit of account. Accordingly, an entity should not consider the contractual sale restriction when measuring the equity security’s fair value. In addition, ASU No. 2022-03 prohibits an entity from recognizing a contractual sale restriction as a separate unit of account. ASU No. 2022-03’s amendments are effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU No. 2022-03 on its financial statements.

 

In March 2020, the FASB issued “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”) to provide optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 established Topic 848 to provide relief during the temporary transition period and includes a sunset provision based on expectations of when the London Interbank Offered Rate (“LIBOR”) would cease being published.  In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which deferred the sunset day of this guidance to December 31, 2024.  With the adoption of ASU 2022-06, there was no significant impact to the Company’s financial position.

 

3. Fair Value Measurements

 

As noted above, the Issuer 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 Issuer 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 Issuer has the ability to access.

 

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  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 include 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 Issuer continues to employ the valuation policy that is consistent with ASC 820 and the Investment Company Act of 1940, as amended (“1940 Act”).

 

The following table presents fair value measurements of investments, by major class, as of February 28, 2023, according to the fair value hierarchy:

 

   Fair Value Measurements 
   Level 1   Level 2   Level 3   Total 
Term loans  $-   $541,492,510   $64,461,958   $605,954,468 
Equity interests   -    -    -    - 
Total  $-   $541,492,510   $64,461,958   $605,954,468 

 

The following table presents fair value measurements of investments, by major class, as of February 28, 2022, according to the fair value hierarchy:

 

   Fair Value Measurements 
   Level 1   Level 2   Level 3   Total 
Term loans  $             -   $569,454,996   $69,474,664   $638,929,660 
Equity interests   -    33,690    -    33,690 
Total  $-   $569,488,686   $69,474,664   $638,963,350 

 

 

Transfers into or out of Level 1, 2 or 3 are recognized at the reporting date.

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 28, 2023:

 

   First Lien Term Loan   Equity Interests   Total 
Balance as of February 28, 2022  $69,474,664   $-   $69,474,664 
Payment-in-kind and other adjustments to cost   -          -    - 
Net accretion of discount on investments   97,816    -    97,816 
Net change in unrealized depreciation on investments   (633,895)   -    (633,895)
Purchases   15,870,770    -    15,870,770 
Sales and repayments   (9,192,436)   -    (9,192,436)
Net realized loss from investments   (38,093)   -    (38,093)
Transfers in (1)   19,263,898    -    19,263,898 
Transfers out (2)   (30,380,766)   -    (30,380,766)
Balance as of February 28, 2023  $64,461,958   $-   $64,461,958 
Net change in unrealized depreciation for the year relating to those Level 3 assets that were still held by the Issuer at the end of the year  $(975,369)  $-   $(975,369)

 

 

(1) The Issuer’s investment in Level 3 investments were classified as such during the year ended February 28, 2023, as market quotes for these investments are only provided by one trading desk.

 

(2) The Issuer’s investment in Level 2 investments were classified as such during the year ended February 28, 2023, as the number of observable market quotes for these investments increased.

 

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The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 28, 2022:

 

   Term Loans   Equity Interests   Total 
Balance as of February 28, 2021  $72,143,745   $          -   $72,143,745 
Payment-in-kind and other adjustments to cost   588    -    588 
Net accretion of discount on investments   89,461    -    89,461 
Net change in unrealized depreciation on investments   (439,530)   -    (439,530)
Purchases   36,918,645    -    36,918,645 
Sales and repayments   (25,101,621)   -    (25,101,621)
Net realized gain from investments   55,350    -    55,350 
Transfers in (1)   13,167,311    -    13,167,311 
Transfers out (2)   (27,359,285)   -    (27,359,285)
Balance as of February 28, 2022  $69,474,664   $-   $69,474,664 
Net change in unrealized depreciation for the year relating to those Level 3 assets that were still held by the Issuer at the end of the year  $(283,685)  $-   $(283,685)

 

 

(1)The Issuer’s investment in Level 3 investments were classified as such during the year ended February 28, 2022, as market quotes for these investments are only provided by one trading desk.
(2)The Issuer’s investment in Level 2 investments were classified as such during the year ended February 28, 2022, as the number of observable market quotes for these investments increased.

 

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.

 

Sales and repayments represent net proceeds received from investments sold and principal paydowns received, during the period.

 

Significant unobservable inputs used in the fair value measurement of the Level 3 term loans and equity include market quotations available from multiple dealers. A significant increase (decrease) in the market quote, in isolation, would result in a significantly lower (higher) fair value measurement.

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 28, 2023 were as follows:

 

   Fair Value   Valuation Technique  Unobservable Inputs 

Ranage

(Weighted Average)*

 
Term loans  $64,461,958   Market Comparables  Third-Party Bid   82.00% - 100.00% (96.68%)  
Total  $64,461,958            

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 28, 2022 were as follows:

 

   Fair Value   Valuation Technique  Unobservable Inputs  Weighted Average* 
Term loans  $69,474,664   Market Comparables  Third-Party Bid   95.00% - 99.75% (97.37%)  
Total  $69,474,664            

 

 

*Weighted average represents the arithmetic average of the inputs and is not weighted by the relative fair value or notional amount.

 

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4. Financing

 

On January 22, 2008, the Issuer issued $400.0 million of notes, consisting of Class A Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes (collectively the “Secured Notes”), and Subordinated Notes. The notes were issued pursuant to the Indenture.

 

The Secured Notes are limited recourse obligations of the Issuer. The Subordinated Notes are unsecured, limited recourse debt obligations of the Issuer.

 

On February 26, 2021, in a refinancing transaction, the Issuer issued $722.0 million of notes consisting of Class A-1-R-3 Senior Secured Floating Rate Notes, Class A-2-R-3 Senior Secured Floating Rate Notes, Class B-FL-R-3 Senior Secured Floating Rate Notes, Class B-FXD-R-3 Senior Secured Fixed Rate Notes, Class C-FL-R-3 Deferrable Mezzanine Floating Rate Notes, Class C-FXD-R-3 Deferrable Mezzanine Fixed Rate Notes, Class D-R-3 Deferrable Mezzanine Floating Rate Notes, Class E-R-3 Deferrable Mezzanine Floating Rate Notes, Class F-R-3 Deferrable Junior Floating Rate Notes, and Subordinated Notes. Proceeds net of issue discounts were used along with existing trust assets to redeem all of the rated note classes of the 2013-1 Reset CLO Notes. $69.5 million of Subordinated Notes issued in connection with the 2008 CLO Notes, 2013-1 CLO Notes, 2013-1 Amended CLO Notes and 2013-1 CLO Reset Notes were not redeemed and remained outstanding. On August 9, 2021, the Company exchanged its existing $17.9 million Class F-R-3 Notes for $8.5 million Class F-1-R-3 Notes and $9.4 million Class F-2-R-3 Notes at par.

 

The 2013-1 2021 Reset CLO Notes are limited recourse obligations of the Issuer. The Subordinated Notes are unsecured, limited recourse debt obligations of the Issuer.

 

The relative order of seniority of payment of each class of securities is as follows: first, Class A-1-R- 3 Notes, second, Class A-2-R-3 Notes, third Class B-FL-R-3 Notes, fourth, Class B-FXD-R-3 Notes, fifth, Class C-FL-R-3 Notes, sixth, Class C-FXD-R-3 Notes, seventh, Class D-R-3 Notes, eighth, Class E-R-3 Notes, ninth, Class F-1-R-3 Notes, Class F-2-R-3 Notes, and tenth the Subordinated Notes, with (a) each class of securities (other than the Subordinated Notes) in such list being senior to each other class of securities that follows such class of securities in such list and (b) each class of securities in such list being subordinate to each other class of securities that precedes such class of securities in such list. The Subordinated Notes are subordinated to the 2013-1 2021 Reset CLO Notes and are entitled to periodic payments from interest proceeds available in accordance with the Priority of Payments.

 

The table below sets forth certain information for each outstanding class of notes issued, pursuant to the loan agreements and Indenture at February 28, 2023.

 

Description  Interest Rate   Maturity   Principal Amount   Amount
Outstanding
   Weighted Average
Interest Rate
 
Saratoga Investment Corp. CLO 2013-1, Ltd. Notes:                         
Class A-1-R-3 Senior Secured Floating Rate Notes   LIBOR + 1.32%   April 20, 2033   $357,500,000   $357,500,000    1.61%
Class A-2-R-3 Senior Secured Floating Rate Notes   LIBOR + 1.65%   April 20, 2033    65,000,000    65,000,000    1.95%
Class B-FL-R-3 Senior Secured Floating Rate Notes   LIBOR + 1.80%   April 20, 2033    60,500,000    60,500,000    2.11%
Class B-FXD-R-3 Senior Secured Fixed Rate Notes   2.54%   April 20, 2033    11,000,000    11,000,000    2.67%
Class C-FL-R-3 Deferrable Mezzanine Floating Rate Notes   LIBOR + 2.40%   April 20, 2033    26,000,000    26,000,000    2.72%
Class C-FXD-R-3 Deferrable Mezzanine Fixed Rate Notes   3.31%   April 20, 2033    6,500,000    6,500,000    3.48%
Class D-R-3 Deferrable Mezzanine Floating Rate Notes   LIBOR + 4.00%   April 20, 2033    39,000,000    39,000,000    4.36%
Class E-R-3 Deferrable Mezzanine Floating Rate Notes   LIBOR + 7.50%   April 20, 2033    27,625,000    27,625,000    7.95%
Class F-1-R-3 Notes Deferrable Junior Floating Rate Notes   LIBOR + 10.00%   April 20, 2033    8,500,000    8,500,000    10.52%
Class F-2-R-3 Notes Deferrable Junior Floating Rate Notes   LIBOR + 10.00%   April 20, 2033    9,375,000    9,375,000    10.52%
Subordinated Notes   N/A    April 20, 2033    111,000,000    111,000,000    N/A 
             $722,000,000   $722,000,000      

 

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The table below sets forth certain information for each outstanding class of notes issued, pursuant to the loan agreements and Indenture at February 28, 2022.

 

Description  Interest Rate   Maturity   Principal Amount   Amount
Outstanding
   Weighted Average
Interest Rate
 
Saratoga Investment Corp. CLO 2013-1, Ltd. Notes:                         
Class A-1-R-3 Senior Secured Floating Rate Notes   LIBOR + 1.32%   April 20, 2033   $357,500,000   $357,500,000    1.61%
Class A-2-R-3 Senior Secured Floating Rate Notes   LIBOR + 1.65%   April 20, 2033    65,000,000    65,000,000    1.95%
Class B-FL-R-3 Senior Secured Floating Rate Notes   LIBOR + 1.80%   April 20, 2033    60,500,000    60,500,000    2.11%
Class B-FXD-R-3 Senior Secured Fixed Rate Notes   2.54%   April 20, 2033    11,000,000    11,000,000    2.67%
Class C-FL-R-3 Deferrable Mezzanine Floating Rate Notes   LIBOR + 2.40%   April 20, 2033    26,000,000    26,000,000    2.72%
Class C-FXD-R-3 Deferrable Mezzanine Fixed Rate Notes   3.31%   April 20, 2033    6,500,000    6,500,000    3.48%
Class D-R-3 Deferrable Mezzanine Floating Rate Notes   LIBOR + 4.00%   April 20, 2033    39,000,000    39,000,000    4.36%
Class E-R-3 Deferrable Mezzanine Floating Rate Notes   LIBOR + 7.50%   April 20, 2033    27,625,000    27,625,000    7.95%
Class F-1-R-3 Notes Deferrable Junior Floating Rate Notes   LIBOR + 10.00%   April 20, 2033    8,500,000    8,500,000    10.52%
Class F-2-R-3 Notes Deferrable Junior Floating Rate Notes   LIBOR + 10.00%   April 20, 2033    9,375,000    9,375,000    10.52%
Subordinated Notes   N/A    April 20, 2033    111,000,000    111,000,000    N/A 
             $722,000,000   $722,000,000      

 

The following table shows the fair value of the Issuer’s debt outstanding as of February 28, 2023:(a)

 

Debt Security  February 28,
2023
 
Saratoga Investment Corp. CLO 2013-1, Ltd. Notes:    
Class A-1-R-3 Senior Secured Floating Rate Notes  $359,565,649 
Class A-2-R-3 Senior Secured Floating Rate Notes   65,537,373 
Class B-FL-R-3 Senior Secured Floating Rate Notes   61,017,654 
Class B-FXD-R-3 Senior Secured Fixed Rate Notes   11,009,371 
Class C-FL-R-3 Deferrable Mezzanine Floating Rate Notes   26,253,490 
Class C-FXD-R-3 Deferrable Mezzanine Fixed Rate Notes   6,508,929 
Class D-R-3 Deferrable Mezzanine Floating Rate Notes   39,515,127 
Class E-R-3 Deferrable Mezzanine Floating Rate Notes   28,232,871 
Class F-1-R-3 Notes Deferrable Junior Floating Rate Notes   8,749,793 
Class F-2-R-3 Notes Deferrable Junior Floating Rate Notes   8,831,406 
Subordinated Notes   21,176,578 
   $636,398,241 

 

The following table shows each outstanding class of notes issued, pursuant to the Indenture, at fair value at February 28, 2022:(a)

 

Debt Security  February 28, 2022 
Saratoga Investment Corp. CLO 2013-1, Ltd. Notes:    
Class A-1-R-3 Senior Secured Floating Rate Notes  $358,553,279 
Class A-2-R-3 Senior Secured Floating Rate Notes   65,271,765 
Class B-FL-R-3 Senior Secured Floating Rate Notes   60,768,540 
Class B-FXD-R-3 Senior Secured Fixed Rate Notes   11,011,752 
Class C-FL-R-3 Deferrable Mezzanine Floating Rate Notes   26,143,672 
Class C-FXD-R-3 Deferrable Mezzanine Fixed Rate Notes   6,511,247 
Class D-R-3 Deferrable Mezzanine Floating Rate Notes   39,344,655 
Class E-R-3 Deferrable Mezzanine Floating Rate Notes   28,118,353 
Class F-1-R-3 Notes Deferrable Junior Floating Rate Notes   8,711,167 
Class F-2-R-3 Notes Deferrable Junior Floating Rate Notes   9,375,000 
Subordinated Notes   28,654,905 
   $642,464,335 

 

(a)These notes are fair valued based on a discounted cash flow model, specifically using Intex cash flow models, to form the basis for the valuation and would be classified as Level 3 liabilities within the fair value hierarchy.

 

S-63

 

 

The Indenture provides that payments on the Subordinated Notes shall rank subordinate in priority of payment to payments due on all classes of 2013-1 2021 Reset CLO Notes and subordinate in priority of payment to the payment of fees and expenses. Distributions on the Subordinated Notes are limited to the assets of the Issuer remaining after payment of all of the liabilities of the Issuer that rank senior in priority of payment to the Subordinated Notes. To the extent that the proceeds from the collateral are not sufficient to make distributions on the Subordinated Notes the Issuer will have no further obligation in respect of the Subordinated Notes.

 

Interest proceeds and, after the 2013-1 2021 Reset CLO Notes have been paid in full, principal proceeds in each case will be distributed to the holders of the Subordinated Notes in accordance with the Indenture.

 

Distributions, if any, on the Subordinated Notes will be payable quarterly on the 20th day of each January, April, July and October of each calendar year or, if any such day is not a business day, on the next succeeding business day (each, a “Payment Date”), commencing on the first Payment Date, and on April 20, 2033 (or if any such day is not a business day, the next succeeding business day) (the “Stated Redemption Date”) (if not redeemed prior to such date) sequentially in order of seniority. At the Stated Redemption Date, the Subordinated Notes will be redeemed after payment in full of all of the 2013-1 2021 Reset CLO Notes and the payment of all administrative and other fees and expenses. The failure to pay interest proceeds or principal proceeds to the holders of the Subordinated Notes will not be an event of default under the Indenture.

 

As of February 28, 2023, the remaining unamortized discount on Class A-1-R-3 Notes, Class A-2-R- 3 Notes, Class B-FL-R-3 Notes, Class B-FXD-R-3 Notes, Class C-FL-R-3 Notes, Class C-FXD-R-3 Notes, Class D-R-3 Notes, Class E-R-3 Notes, Class F-1-R-3 Notes and F-2-R-3 were $0.0 million, $0.0 million, $0.0 million, $0.0 million, $0.0 million, $0.0 million, $0.2 million, $2.5 million, $0.0 million and $0.0 million, respectively.

 

As of February 28, 2022, the remaining unamortized discount on Class A-1-R-3 Notes, Class A-2-R- 3 Notes, Class B-FL-R-3 Notes, Class B-FXD-R-3 Notes, Class C-FL-R-3 Notes, Class C-FXD-R-3 Notes, Class D-R-3 Notes, Class E-R-3 Notes, Class F-1-R-3 Notes and F-2-R-3 were $0.0 million, $0.0 million, $0.0 million, $0.0 million, $0.0 million, $0.0 million, $0.3 million, $2.1 million, $0.0 million and $0.0 million, respectively.

 

For the year ended February 28, 2021, costs associated with the 2013-1 CLO Notes of $1.8 million in remaining unamortized deferred debt financing costs and $1.3 million in unamortized discount were recognized as additional amortization expense when the related notes were extinguished and recorded within realized loss on extinguishment of debt in the statement of operations.

 

As of February 28, 2023, remaining capitalized financing costs of $1.9 million related to the 2013-1 2021 Reset CLO Notes are being amortized over the term of the 2013-1 2021 Reset CLO Notes.

 

On February 11, 2020, CLO 2013-1 Warehouse 2, a wholly owned subsidiary of Saratoga CLO, entered into a loan payable with a third party, pursuant to which CLO 2013-1 Warehouse 2 may borrow from time to time up to $80 million in order to provide capital necessary to support warehouse activities. The loan payable, which expires on August 11, 2021, bears interest at an annual rate of 3M USD LIBOR + 1.25% through November 11, 2020 and 3M USD LIBOR + 1.75% thereafter. For the year ended February 28, 2021, the Saratoga CLO recognized interest expense of $0.2 million related to the loan payable, with a loan payable balance of $0.0 million as February 28, 2021.

 

5. Income Tax

 

Under the current laws, the Issuer is not subject to net income taxation in the United States or the Cayman Islands. Accordingly, no provision for income taxes has been made in the accompanying financial statements.

 

Pursuant to ASC Topic 740, Accounting for Uncertainty in Income Taxes, the Issuer adopted the provisions of the FASB relating to accounting for uncertainty in income taxes which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements and applies to all open tax years as of the effective date. The Investment Manager has analyzed such tax positions for uncertain tax positions for tax years that may be open (2019—2022). The Issuer identifies its major tax jurisdictions as U.S. Federal, state and foreign jurisdictions where the Issuer makes investments. As of February 28, 2023 and February 28, 2022, there was no impact to the financial statements as a result of the Issuer’s accounting for uncertainty in income taxes. The Issuer does not have any unrecognized tax benefits or liabilities for the years ended February 28, 2023, February 28, 2022 and February 28, 2021. Also, the Issuer recognizes interest and, if applicable, penalties for any uncertain tax positions, as a component of income tax expense. No interest or penalty expense was recorded by the Issuer for the years ended February 28, 2023, February 28, 2022 and February 28, 2021.

 

6. Commitments and Contingencies

 

In the ordinary course of its business, the Issuer 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 Issuer. Based on its history and experience, the Investment Manager feels that the likelihood of such an event is remote. Therefore, the Issuer has not accrued any liabilities in connection with such indemnifications.

 

In the ordinary course of business, the Issuer 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 Issuer. As of February 28, 2023 and February 28, 2022, the Issuer is not subject to any material legal proceedings. Therefore, the Issuer has not accrued any liabilities in connection with such indemnifications.

 

S-64

 

 

The terms of Collateralized Debt Investments may require the Issuer to provide funding for any unfunded portion of a Collateralized Debt Investment at the request of the borrower. At February 28, 2023 and February 28, 2022, the Issuer had $1.9 million and $2.1 million of unfunded commitments outstanding, respectively.

 

7. Related Party Transactions

 

In the ordinary course of business and as permitted per the terms of the Indenture, the Issuer may acquire or sell investments to or from related parties at the fair value at such time. For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, the Issuer neither bought nor sold investments from related parties.

 

The Subordinated Notes are wholly owned by the Investment Manager. The Subordinated Notes do not have a stated coupon rate but are entitled to residual cash flows from the CLO’s investments after all of the other tranches of debt and certain other fees and expenses are paid. For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, $4.9 million, $5.2 million and $7.9 million of payments to the Subordinated Notes were included in interest and debt financing expenses in the statements of operations, respectively. For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, $4.4 million, $4.4 million and $3.2 million, respectively, in discount amortization related to the Subordinated Notes is also included in interest and debt financing expenses on the Issuer’s statements of operations.

 

The Investment Manager holds aggregate principal amounts of $8.5 million in Class F-1-R-3 Notes and $9.4 million in Class F-2-R-3 Notes of the CLO tranches with a coupon of LIBOR plus 10.00% at February 28, 2023 and February 28, 2022. For the years ended February 28, 2023, February 28, 2022 and February 28, 2021, payments for the Class F-1-R-3, Class F-2-R-3, Class F-R-3, Class F-R-2 Notes and Class G-R-2 Notes totaling $2.2 million, $0.8 million and $0.9 million, respectively, are included in interest and debt financing expenses in the Issuer’s statements of operations. Expenses relating to the refinancing were paid for by the Company on behalf of Saratoga CLO and are included in due to affiliate on the statements of assets and liabilities at February 28, 2021 and were subsequently repaid during fiscal year 2022.

 

In addition, as of February 28, 2023, included in due from affiliate are amounts reimbursable to Saratoga CLO for shared operating expenses with a related party. As of February 28, 2022, no such reimbursable amounts were due to Saratoga CLO.

 

S-65

 

 

8. Shareholders’ Capital

 

Capital contributions and distributions shall be made at such time and in such amounts as determined by the Investment Manager and the Indenture.

 

The majority holder of the Subordinated Notes has various control rights over the CLO, including the ability to call the CLO prior to its legal maturity, replace the Investment Manager under certain circumstances, and refinance any of the outstanding debt tranches. The voting structure of the Subordinated Notes may require either majority or unanimous approval depending upon the issue.

 

The authorized share capital of the Issuer consists of 50,000 ordinary shares, 250 of which are owned by Maples Finance Limited and are held under the terms of a declaration of trust.

 

As of February 28, 2023 and February 28, 2022, net assets (deficit) were $(70.6) million and $(37.2) million, respectively. These amounts include accumulated losses of $70.6 million and $37.2 million, respectively, which include cumulative net investment income or loss, cumulative amounts of gains and losses realized from investment transactions, net unrealized appreciation or depreciation of investments, as well as the cumulative effect of accounting mismatches between investments accounted for at fair value and amortized cost or accrual-basis assets and liabilities as discussed in Significant Accounting Policies, above. The Issuer’s investments continue to generate sufficient liquidity to satisfy its obligations on periodic payment dates as well as comply with all performance criteria as of the statements of assets and liabilities date.

 

The Issuer adopted Rule 3-04/Rule 8-03(a)(5) under Regulation S-X. Pursuant to the regulation, the Issuer has presented a reconciliation of the changes in each significant caption of stockholders’ equity for each of the three fiscal years ended February 28, 2023, February 28, 2022 and February 28, 2021, as shown in the tables below:

 

   For the Year Ended February 28, 2023 
           Capital   Total
Distributable
     
   Common Stock   in Excess   Earnings   Net Assets 
      

Shares

   

Amount

   of Par Value  (Loss)   (Deficit) 
Balance at February 28, 2022   250   $250   $-   $ (37,197,733)  $ (37,197,483)
Increase (Decrease) from Operations:                         
Net investment loss     -    -    -    (286,724)   (286,724)
Net realized gain (loss) from investments   -    -    -    77,656    77,656 
Net change in unrealized depreciation on investments   -    -    -    (24,681,988)   (24,681,988)
Balance at May 31, 2022   250    250    -    (62,088,789)   (62,088,539)
Increase (Decrease) from Operations:   -    -    -           
Net investment loss   -    -    -    (507,279)   (507,279)
Net realized gain (loss) from investments   -    -    -    (1,144,858)   (1,144,858)
Net change in unrealized depreciation on investments   -    -    -    (1,544,463)   (1,544,463)
Balance at August 31, 2022   250    250    -    (65,285,389)   (65,285,139)
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    586,193    586,193 
Net realized gain (loss) from investments   -    -    -    (532,640)   (532,640)
Net change in unrealized depreciation on investments   -    -             -    (10,640,311)   (10,640,311)
Balance at November 30, 2022   250    250    -    (75,872,147)   (75,871,897)
Increase (Decrease) from Operations:                         
Net investment income    -    -    -    776,828    776,828 
Net realized gain (loss) from investments   -    -    -    (6,812,995)   (6,812,995)
Net change in unrealized appreciation on investments   -    -    -    11,281,144    11,281,144 
Balance at February 28, 2023   250    250    -    (70,627,170)   (70,626,920)

 

S-66

 

 

   For the Year Ended February 28, 2022 
           Capital   Total
Distributable
     
   Common Stock   in Excess   Earnings   Net Assets 
   Shares   Amount   of Par Value   (Loss)   (Deficit) 
Balance at February 28, 2021   250   $250   $-   $(28,538,114)  $(28,537,864)
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    2,315,511    2,315,511 
Net realized gain (loss) from investments   -    -                 -    (565,094)   (565,094)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (481,097)   (481,097)
Balance at May 31, 2021   250    250    -    (27,268,794)   (27,268,544)
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    1,397,282    1,397,282 
Net realized gain (loss) from investments   -    -    -    175,669    175,669 
Net change in unrealized depreciation on investments   -    -    -    (662,095)   (662,095)
Balance at August 31, 2021   250    250    -    (26,357,938)   (26,357,688)
Increase (Decrease) from Operations:                         
Net investment loss   -    -    -    (647,430)   (647,430)
Net realized gain (loss) from investments   -    -    -    (662,289)   (662,289)
Net change in unrealized depreciation on investments   -    -    -    (4,277,923)   (4,277,923)
Balance at November 30, 2021   250    250    -    (31,945,580)   (31,945,330)
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    168,313    168,313 
Net realized gain (loss) from investments   -    -    -    (12,099)   (12,099)
Net change in unrealized depreciation on investments   -    -    -    (5,408,367)   (5,408,367)
Balance at February 28, 2022   250    250    -    (37,197,733)   (37,197,483)

 

   For the Year Ended February 28, 2021 
           Capital   Total
Distributable
     
   Common Stock   in Excess   Earnings   Net Assets 
   Shares   Amount   of Par Value   (Loss)   (Deficit) 
Balance at February 29, 2020   250   $250   $          -   $(35,102,419)  $(35,102,169)
Increase (Decrease) from Operations:                         
Net investment loss   -    -    -    (758,157)   (758,157)
Net realized gain (loss) from investments   -    -    -    (1,803,884)   (1,803,884)
Net change in unrealized depreciation on investments   -    -    -    (31,575,429)   (31,575,429)
Balance at May 31, 2020   250    250    -    (69,239,889)   (69,239,639)
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    60,339    60,339 
Net realized gain (loss) from investments   -    -    -    (4,338,586)   (4,338,586)
Net change in unrealized appreciation  on investments   -    -    -    26,457,779    26,457,779 
Balance at August 31, 2020   250    250    -    (47,060,357)   (47,060,107)
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    221,123    221,123 
Net realized gain (loss) from investments   -    -    -    (3,089,206)   (3,089,206)
Net change in unrealized appreciation on investments   -    -    -    14,923,956    14,923,956 
Balance at November 30, 2020   250    250    -    (35,004,484)   (35,004,234)
Increase (Decrease) from Operations:                         
Net investment loss   -    -    -    (823,187)   (823,187)
Net realized gain (loss) from investments   -    -    -    (1,690,951)   (1,690,951)
Net change in unrealized appreciation  on investments   -    -    -    11,969,271    11,969,271 
Realized losses on extinguishment of debt   -    -    -    (2,988,763)   (2,988,763)
Balance at February 28, 2021   250    250    -    (28,538,114)   (28,537,864)

 

S-67

 

 

9. Financial Highlights

 

The following is a schedule of financial highlights for the years ended February 28, 2023, February 28, 2022, February 28, 2021, February 29, 2020 and February 28, 2019:

 

   February 28,
2023
   February 28,
2022
   February 28,
2021
   February 29,
2020
   February 28,
2019
 
Average Subordinated Notes’ capital balance (1)  $6,490,703   $34,488,787   $7,593,452   $20,177,254   $18,900,592 
Ratio and supplemental data:                         
Total return (2)   (94.53)%   (9.75)%   150.86%   (46.85)%   (22.41)%
Net investment income (loss) (3)   8.77%   9.38%   (17.12)%   0.01%   0.02%
Total expenses (3)   655.20%   81.89%   383.67%   156.62%   125.54%
Base management fee (3)   10.08%   1.89%   6.60%   2.48%   1.82%
Subordinated management fee (3)   40.30%   7.57%   26.42%   9.93%   7.29%

 

 

(1) Subordinated Notes’ capital balance is calculated based on the sum of the Subordinated Notes outstanding amount and total net assets, net of ordinary equity.
   
(2) Total return is calculated based on a time-weighted rate of return methodology. Quarterly rates of return are compounded to derive the total return reflected above. Total return is calculated for the Subordinated Notes’ capital taken as a whole and assumes the purchase of the Subordinated Notes’ capital on the first day of the period and the sale of the last day of the period.
   
(3) Calculated based on the average Subordinated Notes’ capital balance.

 

10. Subsequent Events

 

The Investment Manager has evaluated events or transactions that have occurred since February 28, 2022 through May 2, 2023, the date the financial statements were available for issuance. The Investment Manager has determined that there are no material events that would require the disclosure in the financial statements.

 

 

S-68

 

 

42 1.32 2.06 3.99 11188629 11456631 11963533 0.06000 0.06000 0.07000 0.07000 2027-01-18 Represents an investment that is not a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, as amended (the 1940 Act”). As of February 28, 2022, non-qualifying assets represent 6.7% of the Company’s portfolio at fair value. As a BDC, the Company generally has to invest at least 70% of its total assets in qualifying assets. Percentages are based on net assets of $355,780,523 as of February 28, 2022. 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). These securities are either fully or partially pledged as collateral under a senior secured revolving credit facility (see Note 8 to the consolidated financial statements). This investment does not have a stated interest rate that is payable thereon. As a result, the 9.27% 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. As defined in the 1940 Act, this portfolio company is an “affiliate” as we own between 5.0% and 25.0% of the outstanding voting securities. GreyHeller, LLC is no longer an affiliate as of February 28, 2022. Transactions during the year ended February 28, 2022 in which the issuer was an affiliate are as follows: As defined in the 1940 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 28, 2022 in which the issuer was both an affiliate and a portfolio company that we control are as follows: Non-income producing at February 28, 2022. All or a portion of this investment has an unfunded commitment as of February 28, 2022. (See Note 9 to the consolidated financial statements). 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Exhibit 4.24

 

DESCRIPTION OF SECURITIES

 

As of the date of the filing of the Annual Report on Form 10-K for fiscal year ended February 28, 2023 (the “Annual Report”), Saratoga Investment Corp (“we,” “our,” “us,” or the “Company”) has five classes of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): (i) its common stock, par value $0.001 per share (“common stock”); (ii) its 6.00% notes due 2027 (the “6.00% 2027 Notes”); (iii) its 8.00% notes due 2027 (the “8.00% 2027 Notes”); (iv) its 8.125% notes due 2027 (the “8.125% 2027 Notes); and (v) its 8.50% notes due 2028 (the “8.50% 2028 Notes,” and together with the 6.00% 2027 Notes, the 8.00% 2027 Notes, and the 8.125% 2027 Notes, the “Notes”).

 

The following descriptions of the Company’s common stock and the Notes are as of the date of the filing of the Annual Report and based on, as applicable, the relevant portions of the Maryland General Corporation Law (“MGCL”), the Company’s articles of amendment, as amended (“charter”), our third amended and restated bylaws (“bylaws”), a base indenture, dated as of May 10, 2013 (the “Base Indenture”), by and between the Company and U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association), as trustee (the “Trustee”), as supplemented by the Tenth Supplemental Indenture (the “Tenth Supplemental Indenture”) with respect to the 6.00% 2027 Notes, Twelfth Supplemental Indenture (the “Twelfth Supplemental Indenture”)with respect to the 8.00% 2027 Notes, the Thirteenth Supplemental Indenture (the “Thirteenth Supplemental Indenture”) with respect to the 8.125% 2027 Notes, and the Fifteenth Supplemental Indenture with respect to the 8.50% 2028 Notes (the “Fifteenth Supplemental Indenture,” and together with the Base Indenture, the Twelfth Supplemental Indenture and the Thirteenth Supplemental Indenture, the “Indenture”). As used herein, the term “Indenture” will refer to the Base Indenture and the respective supplemental indenture governing the respective Note. This summary is a description of the material terms of, and is qualified in its entirety by, the charter, the bylaws and the Indenture, each of which is incorporated by reference as an exhibit to this Annual Report on Form 10-K. As a result, this summary may not contain all of the information that is important to you. We refer you to the MGCL, the charter, the bylaws, and the respective Indenture for a more detailed description of the provisions summarized below.

 

A.Common Stock, $0.001 par value per share

 

The authorized stock of the Company consists of 100,000,000 shares of common stock, par value $0.001 per share. Our common stock trades under the symbol “SAR” on the New York Stock Exchange (the “NYSE”). There are no outstanding options or warrants to purchase our common stock. No shares of common stock have been authorized for issuance under any equity compensation plans. Under MGCL, our stockholders generally are not personally liable for our debts or obligations.

 

Under our governing documents, our board of directors is authorized to create new classes or series of shares of stock and to authorize the issuance of shares of stock without obtaining stockholder approval. Our charter provides that the board of directors, without any action by our stockholders, may amend the charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue.

 

Each share of our common stock has equal rights as to earnings, assets, dividends and voting and all of our outstanding shares of common stock are duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our board of directors and declared by us out of funds legally available therefor. Shares of our common stock have no preemptive, exchange, conversion or redemption rights. In the event of our liquidation, dissolution or winding up, each share of common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of shares of our preferred stock, if any are outstanding at such time. Each share of our common stock entitles its holder to cast one vote on all matters submitted to a vote of stockholders, including the election and removal of directors.

 

 

 

 

Provisions of Our Governing Documents and the Maryland General Corporation Law

 

Our governing documents and the MGCL contain provisions that could make it more difficult for a potential acquiror to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.

 

Classified Board of Directors

 

Our board of directors is divided into three classes of directors serving staggered three-year terms. Directors of each class are elected to serve for three-year terms and until their successors are duly elected and qualify, and each year one class of directors is elected by the stockholders. A classified board may render a change in control of us or removal of our incumbent management more difficult. We believe, however, that the longer time required to elect a majority of a classified board of directors will help to ensure the continuity and stability of our management and policies.

 

Number of Directors; Vacancies; Removal

 

Our governing documents provide that the number of directors will be set only by our board of directors in accordance with our bylaws. Our bylaws provide that a majority of our entire board of directors may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than three nor more than eleven. Our charter provides that, except as may be provided by the board of directors in setting the terms of any class or series of shares of stock, so long as we have a class of securities registered under the Exchange Act and at least three independent directors, any and all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the Investment Company Act of 1940, as amended (the “1940 Act”). If there are no directors then in office, vacancies may be filled by stockholders at a special meeting called for such purpose. Our charter provides that a director may be removed only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors.

 

Election of Directors

 

Our charter and bylaws provide that the affirmative vote of the holders of a plurality of the votes cast at a meeting of our stockholders duly called and at which a quorum is present will be required to elect each director. Pursuant to our charter and bylaws, our board of directors may amend the bylaws to alter the vote required to elect directors.

 

Action by Stockholders

 

All of our outstanding shares of common stock will generally be able to vote on any matter that is a proper subject for action by the stockholders of a Maryland corporation, including in respect of the election or removal of directors as well as other extraordinary matters. Under the MGCL, stockholder action can be taken only at an annual or special meeting of stockholders or by written or electronically-transmitted unanimous consent in lieu of a meeting. These provisions, combined with the requirements of our governing documents regarding the calling of a stockholder-requested special meeting of stockholder discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.

 

2

 

 

Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals

 

Our bylaws provide that, with respect to an annual meeting of our stockholders, nominations of individuals for election to the board of directors and the proposal of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by or at the direction of the board of directors, (3) by any stockholder who is a stockholder of record both at the time of giving notice by the stockholder and at the time of the annual meeting, who is entitled to vote at the meeting and who has complied with the advance notice procedures of the bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of individuals for election to the board of directors at a special meeting may be made only (1) pursuant to our notice of the meeting, (2) by or at the direction of the board of directors, (3) provided that the board of directors has determined that directors will be elected at the meeting, by a stockholder who is a stockholder of record both at the time of giving notice by the stockholder and at the time of the special meeting and who is entitled to vote at the meeting and who has complied with the advance notice provisions of our bylaws or (4) by a stockholder who is entitled to vote at the meeting in circumstances in which a special meeting of stockholders is called for the purpose of electing directors when no directors remain in office.

 

The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our board of directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our board of directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.

 

Calling of Special Meetings of Stockholders

 

Our bylaws provide that special meetings of our stockholders may be called by our board of directors and certain of our officers. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of our stockholders will be called by our secretary upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting, except that, if no directors remain in office, a special meeting of our stockholders shall be called to elect directors by the secretary upon the written request of holders entitled to cast at least 10% of the votes entitled to be cast generally in the election of directors.

 

Amendment of Governing Documents

 

Under Maryland law, a Maryland corporation generally cannot dissolve or amend its charter unless the corporation’s board of directors declares the dissolution or amendment to be advisable and the dissolution or amendment is approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. A Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter generally provides for approval of amendments to our charter by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. However, our charter also provides that certain charter amendments and proposals for our liquidation, dissolution or conversion, whether by merger or otherwise, from a closed-end company to an open-end company require the approval of the stockholders entitled to cast at least two-thirds percent of the votes entitled to be cast on such matter. If such amendment or proposal is approved by at least two-thirds of our continuing directors (in addition to approval by our board of directors), such amendment or proposal may be approved by a majority of the votes entitled to be cast on such a matter. The “continuing directors” are, as defined in our charter, our current directors as well as those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of the continuing directors then on the board of directors.

 

Our governing documents provide that the board of directors has the exclusive power to adopt, alter or repeal any provision of our bylaws and to make new bylaws.

 

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Approval of Extraordinary Actions

 

Under Maryland law, a Maryland corporation generally cannot amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless the corporation’s board of directors declares action or transaction to be advisable and the action or transaction is approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. A Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter.

 

Except for a merger that would result in our conversion to an open-end company, which requires the approval described above, our charter provides that we may merge, sell all or substantially all of our assets, engage in a consolidation or share exchange or engage in similar transactions, if such transaction is declared advisable by our board of directors and approved by a majority of all of the votes entitled to be cast on the matter.

 

No Appraisal Rights

 

Except with respect to appraisal rights arising in connection with the Maryland Control Share Acquisition Act discussed below, as permitted by the MGCL, our governing documents provide that our stockholders will not be entitled to exercise appraisal rights unless a majority of our board of directors determines that such rights will apply with respect to all or any classes or series of stock, to one or more transactions occurring after the date of such determination in connection with which holders of such shares would otherwise be entitled to exercise appraisal rights.

 

Control Share Acquisitions

 

The Control Share Acquisition Act provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights with respect to the control shares except to the extent approved by the affirmative vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:

 

one-tenth or more but less than one-third;

 

one-third or more but less than a majority; or

 

a majority or more of all voting power.

 

The requisite stockholder approval must be obtained each time an acquiror crosses one of the thresholds of voting power set forth above. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A control share acquisition means the acquisition of issued and outstanding control shares, subject to certain exceptions.

 

A person who has made or proposes to make a control share acquisition may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholder meeting.

 

If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may repurchase for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to repurchase control shares is subject to certain conditions and limitations, including, as provided in our bylaws, compliance with the 1940 Act, which will prohibit any such repurchase other than in limited circumstances. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholder meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.

 

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The Control Share Acquisition Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation.

 

Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions by any person of our common stock. Such provision could also be amended or eliminated at any time in the future. The Securities and Exchange Commission (the “SEC”) staff previously took the position that, if a business development company (“BDC”) failed to opt-out of the Control Share Acquisition Act, its actions would be inconsistent with Section 18(i) of the 1940 Act. However, the SEC recently withdrew its previous position, and stated that it would not recommend enforcement action against a closed-end fund, including a BDC, that opts in to being subject to the Control Share Acquisition Act if the closed-end fund acts with reasonable care on a basis consistent with other applicable duties and laws and the duty to the company and its shareholders generally. As such, we may amend our bylaws, but will do so only if our board of directors determines that it would be in our best interests and if such amendment can be accomplished in compliance with applicable laws, regulations and SEC guidance.

 

Business Combinations

 

Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:

 

any person who beneficially owns 10% or more of the voting power of the corporation’s stock; or

 

an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

 

A person is not an interested stockholder under this statute if the board of directors approved in advance the transaction by which the stockholder otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

 

After the five-year prohibition, any business combination between the corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

 

80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

 

two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

 

These super-majority vote requirements do not apply if the corporation’s stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

 

The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Our board of directors has adopted a resolution exempting from the provisions of the Maryland Business Combination Act any business combination between us and any other person. If our board of directors adopts resolutions causing us to be subject to the provisions of the Business Combination Act, these provisions may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

 

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Conflict with 1940 Act

 

Our bylaws provide that, if and to the extent that any provision of the MGCL, including the Control Share Acquisition Act or the Business Combination Act (if we amend our bylaws to be subject to such Acts), or any provision of our charter or bylaws conflicts with any provision of the 1940 Act, the applicable provision of the 1940 Act will control.

 

B.Debt Securities

 

Unless otherwise specifically stated, the summary below relates to each of the 6.00% 2027 Notes, the 8.00% 2027 Notes, the 8.125% 2027 Notes and the 8.50% 2028 Notes, and therefore, references to the “Notes” below refer to each of the 6.00% 2027 Notes, the 8.00% 2027 Notes, the 8.125% 2027 Notes and the 8.50% 2028 Notes.

 

The 6.00% 2027 Notes

 

On April 27, 2022, the Company issued $87.5 million in aggregate principal amount of the 6.00% 2027 Notes for net proceeds of $84.8 million, based on a public offering price of 100% of par, after deducting underwriting commissions of approximately $2.7 million. Offering costs incurred were approximately $0.1 million. On May 10, 2022, the underwriters partially exercised their option to purchase an additional $10.0 million in aggregate principal amount of the 6.00% 2027 Notes. Net proceeds to the Company were $9.7 million after deducting underwriting commissions of approximately $0.3 million. Interest on the 6.00% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.00% per year. The 6.00% 2027 Notes mature on April 30, 2027 and commencing April 27, 2024, 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 $3.5 million related to the 6.00% 2027 Notes have been capitalized and are being amortized over the term of the 6.00% 2027 Notes. The 6.00% 2027 Notes are listed on the NYSE under the trading symbol “SAT” with a par value of $25.00 per note.

 

On August 15, 2022, the Company issued an additional $8.0 million in aggregate principal amount of the 6.00% 2027 Notes (the “Additional 6.00% 2027 Notes”) for net proceeds of $7.8 million, based on the public offering price of 97.80% of the aggregate principal amount of the 6.00% 2027 Notes. The Additional 6.00% 2027 Notes are treated as a single series with the existing 6.00% 2027 Notes under the indenture and had the same terms as the existing 6.00% 2027 Notes. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Additional offering costs incurred were approximately $0.03 million. Additional financing costs of $0.03 million related to the 6.00% 2027 Notes have been capitalized and are being amortized over the term of the 6.00% 2027 Notes.

 

The 6.00% 2027 Notes were issued under the Base Indenture, as supplemented by the Tenth Supplemental Indenture.

 

The 8.00% 2027 Notes

 

On October 27, 2022, the Company issued $40.0 million in aggregate principal amount of the 8.00% 2027 Notes for net proceeds of $38.7 million, based on a public offering price of 100% of par, after deducting underwriting commissions of approximately $1.3 million. Offering costs incurred were approximately $0.1 million. On November 10, 2022, the underwriters partially exercised their option to purchase an additional $6.0 million in aggregate principal amount of the 8.00% 2027 Notes. Net proceeds to the Company were $5.8 million after deducting underwriting commissions of approximately $0.2 million. Interest on the 8.00% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 8.00% per year. The 8.00% 2027 Notes mature on October 31, 2027 and commencing October 27, 2024, 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 $1.3 million related to the 8.00% 2027 Notes have been capitalized and are being amortized over the term of the 8.00% 2027 Notes. The 8.00% 2027 Notes are listed on the NYSE under the trading symbol “SAJ” with a par value of $25.00 per note.

 

The 8.00% 2027 Notes were issued under the Base Indenture, as supplemented by the Twelfth Supplemental Indenture.

 

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The 8.125% 2027 Notes

 

On December 13, 2022, the Company issued $52.5 million in aggregate principal amount of the 8.125% 2027 Notes for net proceeds of $50.9 million, based on a public offering price of 100% of par, after deducting underwriting commissions of approximately $1.6 million. Offering costs incurred were approximately $0.1 million. On December 21, 2022, the underwriters fully exercised their option to purchase an additional $7.875 million in aggregate principal amount of the 8.125% 2027 Notes. Net proceeds to the Company were $7.6 million after deducting underwriting commissions of approximately $0.2 million. Interest on the 8.125% 2027 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 8.125% per year. The 8.125% 2027 Notes mature on December 31, 2027 and commencing December 13, 2024, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from this offering were used to make investments in middle-market companies (including investments made through our small business investment company subsidiaries) in accordance with our investment objective and strategies and for general corporate purposes. Financing costs of $1.6 million related to the 8.125% 2027 Notes have been capitalized and are being amortized over the term of the 8.125% 2027 Notes. The 8.125% 2027 Notes are listed on the NYSE under the trading symbol “SAY” with a par value of $25.00 per note.

 

The 8.125% 2027 Notes were issued under the Base Indenture, as supplemented by the Thirteenth Supplemental Indenture.

 

The 8.50% 2028 Notes

 

On April 14, 2023, we issued $50.0 million in aggregate principal amount of the 8.50% 2028 Notes for net proceeds of $48.2 million, based on a public offering price of 100% of par, after deducting underwriting discounts and commissions of approximately $1.6 million and estimated offering expenses of approximately $0.2 million. On April 26, 2023, the underwriters fully exercised their option to purchase an additional $7.5 million in aggregate principal amount of the 8.50% 2028 Notes. Net proceeds to the Company were $7.3 million after deducting underwriting commissions of approximately $0.2 million. Interest on the 8.50% 2028 Notes will be paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 8.50% per year, beginning May 31, 2023. The 8.50% 2028 Notes mature on April 15, 2028 and commencing April 14, 2025, may be redeemed in whole or in part at any time or from time to time at our option. We intend to use the net proceeds of the offering to repay a portion of outstanding indebtedness under the senior secured revolving credit facility with Encina Lender Finance, LLC (the “Encina Credit Facility”), make investments in middle-market companies in accordance with our investment objective and strategies (including investments made through Saratoga Investment Corp. SBIC III LP) and for general corporate purposes. The 8.50% 2028 Notes are listed on the NYSE under the trading symbol “SAZ” with a par value of $25.00 per share.

 

The 8.50% 2028 Notes were issued under the Base Indenture, as supplemented by the Fifteenth Supplemental Indenture.

 

General

 

For purposes of this description, any reference to the payment of principal of, or premium or interest, if any, on the Notes will include additional amounts if required by the terms of such Notes.

 

As required by federal law for all bonds and notes of companies that are publicly offered, the debt securities are governed by a document called an “indenture.” An indenture is a contract between us and the financial institution acting as trustee on your behalf, and is subject to and governed by the Trust Indenture Act of 1939, as amended. The trustee has two main roles. First, the trustee can enforce your rights against us if we default. There are some limitations on the extent to which the trustee acts on your behalf, described in the second paragraph under “Events of Default—Remedies if an Event of Default Occurs.” Second, the trustee performs certain administrative duties for us with respect to our debt securities.

 

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The Indenture provides that any debt securities may be issued under the Indenture in one or more series. The Indenture does not limit the amount of debt securities that may be issued thereunder from time to time. Debt securities issued under the Indenture, when a single trustee is acting for all debt securities issued under the Indenture, are called the “indenture securities.” The Indenture also provides that there may be more than one trustee thereunder, each with respect to one or more different series of indenture securities. See “Resignation of Trustee” below. At a time when two or more trustees are acting under the Indenture, each with respect to only certain series, the term “indenture securities” means the one or more series of debt securities with respect to which each respective trustee is acting. In the event that there is more than one trustee under the Indenture, the powers and trust obligations of each trustee will extend only to the one or more series of indenture securities for which it is trustee. If two or more trustees are acting under the Indenture, then the indenture securities for which each trustee is acting would be treated as if issued under separate indentures.

 

The Indenture does not contain any provisions that give you protection in the event we issue a large amount of debt or we are acquired by another entity.

 

We have the ability to issue indenture securities with terms different from those of indenture securities previously issued and, without the consent of the holders thereof, to reopen a previous issue of a series of indenture securities and issue additional indenture securities of that series unless the reopening was restricted when that series was created.

 

Optional Redemption

 

The Notes may be redeemed in whole or in part at any time or from time to time at our option on the applicable redemption date (as set forth above) upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount of the Notes to be redeemed plus accrued and unpaid interest payments otherwise payable thereon for the then-current quarterly interest period accrued to the date fixed for redemption.

 

You may be prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such Note, you will receive, without a charge, a new Note or Notes of authorized denominations representing the principal amount of your remaining unredeemed Notes. Any exercise of our option to redeem the Notes will be done in compliance with the Indenture, the terms of the Encina Credit Facility, and the 1940 Act, to the extent applicable.

 

If we redeem only some of the Notes, the Trustee or, with respect to global securities, DTC will determine the method for selection of the particular Notes to be redeemed, in accordance with the Indenture and the 1940 Act, to the extent applicable, and in accordance with the rules of any national securities exchange or quotation system on which the Notes are listed. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the Notes called for redemption.

 

Ranking of Notes

 

The Notes will be our direct unsecured obligations and will rank:

 

pari passu with, which means equal to, all outstanding and future unsecured unsubordinated indebtedness;

 

senior to any of our future indebtedness that expressly provides it is subordinated to the Notes;

 

effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; and

 

structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries and financing vehicles since the Notes are obligations exclusively of Saratoga Investment Corp. and not of any of our subsidiaries. Structural subordination means that creditors of a parent entity are subordinate to creditors of a subsidiary entity with respect to the subsidiary’s assets.

 

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Denominations

 

The Notes were issued in denominations of $25 and integral multiples of $25 in excess thereof.

 

Sinking Fund

 

The Notes will not be subject to any sinking fund (i.e., no amounts will be set aside by us to ensure repayment of the Notes at maturity). As a result, our ability to repay the Notes at maturity will depend on our financial condition on the date that we are required to repay the Notes.

 

Book-Entry Holders

 

The Notes were issued as registered securities in book-entry form only. We will issue registered debt securities in book-entry form only, unless we specify otherwise in the applicable prospectus supplement. This means debt securities will be represented by one or more global securities registered in the name of a depositary that will hold them on behalf of financial institutions that participate in the depositary’s book-entry system. These participating institutions, in turn, hold beneficial interests in the debt securities held by the depositary or its nominee. These institutions may hold these interests on behalf of themselves or customers.

 

Under the Indenture, only the person in whose name a debt security is registered is recognized as the holder of that debt security. Consequently, for debt securities issued in book-entry form, we will recognize only the depositary as the holder of the debt securities and we will make all payments on the debt securities to the depositary. The depositary will then pass along the payments it receives to its participants, which in turn will pass the payments along to their customers who are the beneficial owners. The depositary and its participants do so under agreements they have made with one another or with their customers; they are not obligated to do so under the terms of the debt securities.

 

As a result, investors will not own debt securities directly. Instead, they will own beneficial interests in a global security, through a bank, broker or other financial institution that participates in the depositary’s book-entry system or holds an interest through a participant. As long as the debt securities are represented by one or more global securities, investors will be indirect holders, and not holders, of the debt securities.

 

Global Securities

 

As noted above, the Notes will be issued in book-entry form and represented by a global security that we deposit with and register in the name of The Depository Trust Company, New York, New York, known as DTC, or its nominee. A global security may not be transferred to or registered in the name of anyone other than the depositary or its nominee, unless special termination situations arise. As a result of these arrangements, the depositary, or its nominee, will be the sole registered owner and holder of all the Notes represented by a global security, and investors will be permitted to own only beneficial interests in a global security.

 

Termination of a Global Security

 

If a global security is terminated for any reason, interests in it will be exchanged for certificates in non-book-entry form (certificated securities). After that exchange, the choice of whether to hold the certificated Notes directly or in street name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their interests in a global security transferred on termination to their own names, so that they will be holders.

 

Payment and Paying Agents

 

We will pay interest to the person listed in the Trustee’s records as the owner of the Notes at the close of business on a particular day in advance of each due date for interest, even if that person no longer owns the Note on the interest due date. That day, usually about two weeks in advance of the interest due date, is called the “record date.” Because we will pay all the interest for an interest period to the holders on the record date, holders buying and selling the Notes must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price of the Notes to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called “accrued interest.”

 

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Payments on Global Securities

 

We will make payments on the Notes so long as they are represented by a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holder’s right to those payments will be governed by the rules and practices of the depositary and its participants.

 

Payment When Offices Are Closed

 

If any payment is due on the Notes on a day that is not a business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the Indenture as if they were made on the original due date. Such payment will not result in a default under the Notes or the Indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.

 

Events of Default

 

You will have rights if an Event of Default occurs in respect of the Notes and the Event of Default is not cured, as described later in this subsection.

 

The term “Event of Default” in respect of the Notes means any of the following:

 

we do not pay the principal of (or premium, if any, on) any Note when due;

 

we do not pay interest on any Note when due, and such default is not cured within 30 days;

 

we remain in breach of a covenant in respect of the Notes for 60 days after we receive a written notice of default stating we are in breach (the notice must be sent by either the Trustee or holders of at least 25% of the principal amount of the Notes);

 

we file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and remain undischarged or unstayed for a period of 60 days; or

 

the Notes have an asset coverage, as such term is defined in the 1940 Act, of less than 100 per centum on the last business day of each of twenty-four consecutive calendar months, after giving effect to any exemptive relief granted to us by the SEC.

 

An Event of Default for the Notes may, but does not necessarily constitute an Event of Default for any other series of debt securities issued under the same or any other indenture. The Trustee may withhold notice to the holders of the Notes of any default, except in the payment of principal or interest, if it in good faith considers the withholding of notice to be in the best interests of the holders.

 

Remedies if an Event of Default Occurs

 

If an Event of Default has occurred and is continuing, the Trustee or the holders of not less than 25% in principal amount of the Notes may declare the entire principal amount of all the Notes to be due and immediately payable. This is called a declaration of acceleration of maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the Notes if (1) we have deposited with the Trustee all amounts due and owing with respect to the Notes (other than principal that has become due solely by reason of such acceleration) and certain other amounts, and (2) any other Events of Default have been cured or waived.

 

Except in cases of default, where the Trustee has some special duties, the Trustee is not required to take any action under the Indenture at the request of any holders unless the holders offer the Trustee protection from expenses and liability reasonably satisfactory to it (called an “indemnity”). If indemnity reasonably satisfactory to it is provided, the holders of a majority in principal amount of the Notes may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the Trustee. The Trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.

 

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Before you are allowed to bypass the Trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the Notes, the following must occur:

 

you must give the Trustee written notice that an Event of Default has occurred and remains uncured;

 

the holders of at least 25% in principal amount of all the Notes must make a written request that the Trustee take action because of the default and must offer reasonable indemnity, security, or both reasonably satisfactory to it against the costs, expenses and other liabilities of taking that action;

 

the Trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity and/or security; and

 

the holders of a majority in principal amount of the Notes must not have given the Trustee a direction inconsistent with the above notice during that 60-day period.

 

However, you are entitled at any time to bring a lawsuit for the payment of money due on your Notes on or after the due date.

 

Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the Trustee and how to declare or cancel an acceleration of maturity.

 

Each year, we will furnish to the Trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the Indenture and the Notes, or else specifying any default.

 

Waiver of Default

 

The holders of a majority in principal amount of the Notes may waive any past defaults other than:

 

the payment of principal or interest; or

 

in respect of a covenant that cannot be modified or amended without the consent of each holder.

 

Merger or Consolidation

 

Under the terms of the Indenture, we are generally permitted to consolidate or merge with another corporation. We are also permitted to sell all or substantially all of our assets to another corporation. However, we may not take any of these actions unless all the following conditions are met:

 

  where we merge out of existence or sell substantially all our assets, the resulting corporation or transferee must agree to be legally responsible for our obligations under the Notes;

 

  the merger or sale of assets must not cause a default on the Notes and we must not already be in default (unless the merger or sale would cure the default). For purposes of this no-default test, a default would include an Event of Default that has occurred and has not been cured, as described under “Events of Default” above. A default for this purpose would also include any event that would be an Event of Default if the requirements for giving us a notice of default or our default having to exist for a specific period of time were disregarded; and

 

  we must deliver certain certificates and documents to the Trustee.

 

Modification or Waiver

 

There are three types of changes we can make to the Indenture and the Notes issued thereunder.

 

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Changes Requiring Your Approval

 

First, there are changes that we cannot make to your Notes without your specific approval. The following is a list of those types of changes:

 

change the stated maturity of the principal of or interest on the Notes;

 

reduce any amounts due on the Notes;

 

reduce the amount of principal payable upon acceleration of the maturity of a Note following a default;

 

change the place or currency of payment on a Note;

 

impair your right to sue for payment;

 

reduce the percentage of holders of Notes whose consent is needed to modify or amend the Indenture; and

 

reduce the percentage of holders of Notes whose consent is needed to waive compliance with certain provisions of the Indenture or to waive certain defaults.

 

Changes Not Requiring Approval

 

The second type of change does not require any vote by the holders of the Notes. This type is limited to clarifications and certain other changes that would not adversely affect holders of the Notes in any material respect.

 

Changes Requiring Majority Approval

 

Any other change to the Indenture and the Notes would require the following approval:

 

  if the change affects only the Notes, it must be approved by the holders of a majority in principal amount of the Notes; and

 

  if the change affects more than one series of debt securities issued under the same indenture, it must be approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose.

 

In each case, the required approval must be given by written consent.

 

The holders of a majority in principal amount of all of the series of debt securities issued under an indenture, voting together as one class for this purpose, may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under “Changes Requiring Your Approval.”

 

Further Details Concerning Voting

 

When taking a vote, we will use the following rules to decide how much principal to attribute to the Notes:

 

The Notes will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their payment or redemption. The Notes will also not be eligible to vote if they have been fully defeased as described later under “Defeasance—Full Defeasance.”

 

We will generally be entitled to set any day as a record date for the purpose of determining the holders of the Notes that are entitled to vote or take other action under the Indenture. However, the record date may not be more than 30 days before the date of the first solicitation of holders to vote on or take such action. If we set a record date for a vote or other action to be taken by holders of the Notes, that vote or action may be taken only by persons who are holders of the Notes on the record date and must be taken within eleven months following the record date.

 

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Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the Indenture or the Notes or request a waiver.

Defeasance

 

The following defeasance provisions will be applicable to the Notes. “Defeasance” means that, by depositing with a Trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on the Notes when due and satisfying any additional conditions noted below, we will be deemed to have been discharged from our obligations under the Notes. In the event of a “covenant defeasance,” upon depositing such funds and satisfying similar conditions discussed below we would be released from the restrictive covenants under the Indenture relating to the Notes.

 

Covenant Defeasance

 

Under current U.S. federal tax law and the Indenture, we can make the deposit described below and be released from some of the restrictive covenants in the Indenture under which the Notes were issued. This is called “covenant defeasance.” In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your Notes. If we achieve covenant defeasance and your Notes were subordinated, such subordination would not prevent the Trustee under the Indenture from applying the funds available to it from the deposit described in the first bullet to the payment of amounts due in respect of such debt securities for the benefit of the subordinated debtholders. In order to achieve covenant defeasance, we must do the following:

 

Since the Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the Notes a combination of cash and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their various due dates;

 

we must deliver to the Trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit;

 

we must deliver to the Trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, and a legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have been complied with;

 

defeasance must not result in a breach or violation of, or result in a default under, the Indenture or any of our other material agreements or instruments; and

 

no default or event of default with respect to the Notes shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days.

 

If we accomplish covenant defeasance, you can still look to us for repayment of the Notes if there were a shortfall in the trust deposit or the Trustee is prevented from making payment. In fact, if one of the remaining Events of Default occurred (such as our bankruptcy) and the Notes became immediately due and payable, there might be a shortfall. Depending on the event causing the default, you may not be able to obtain payment of the shortfall.

 

Full Defeasance

 

If there is a change in U.S. federal income tax law, as described below, we can legally release ourselves from all payment and other obligations on the Notes (called “full defeasance”) if we put in place the following other arrangements for you to be repaid:

 

  Since the Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the Notes a combination of money and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their various due dates;
     
  we must deliver to the Trustee a legal opinion confirming that there has been a change in current U.S. federal tax law or an IRS ruling that allows us to make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit. Under current U.S. federal tax law the deposit and our legal release from the Notes would be treated as though we paid you your share of the cash and notes or bonds at the time the cash and notes or bonds were deposited in trust in exchange for your Notes and you would recognize gain or loss on the Notes at the time of the deposit;

 

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  we must deliver to the Trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, and a legal opinion and officers’ certificate stating that all conditions precedent to defeasance have been complied with;

 

  defeasance must not result in a breach or violation of, or constitute a default under, of the Indenture or any of our other material agreements or instruments; and

 

  no default or event of default with respect to the Notes shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days.

 

If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the Notes. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent. If your Notes were subordinated, such subordination would not prevent the Trustee under the Indenture from applying the funds available to it from the deposit referred to in the first bullet of the preceding paragraph to the payment of amounts due in respect of such Notes for the benefit of the subordinated debtholders.

 

Other Covenants

 

In addition to any other covenants described in this summary, as well as standard covenants relating to payment of principal and interest, maintaining an office where payments may be made or securities can be surrendered for payment, payment of taxes by the Company and related matters, the following covenants will apply to the Notes:

 

We agree that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from incurring additional borrowings, including through the issuance of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% after such borrowings.

 

We agree that for the period of time during which the Notes are outstanding, 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 the threshold specified in Section 18(a)(1)(B) as modified by such provisions of Section 61(a)(2) of the 1940 Act as may be applicable to us from time to time or any successor provisions thereto of the 1940 Act, 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)(2) 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 Internal Revenue Code of 1986, as amended.

 

If, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act to file any periodic reports with the SEC, we agree to furnish to holders of the Notes and the trustee, for the period of time during which the 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 U.S. GAAP.

 

Credit Rating Maintenance

 

With respect to the 8.50% 2028 Notes, the Company has agreed to use commercially reasonable efforts to maintain a credit rating on the 8.50% 2028 Notes by a rating organization designated from time to time by the SEC as being nationally recognized whose status has been confirmed by the Securities Valuation Office of the National Association of Insurance Commissioners. Ladenburg Thalmann & Co. Inc., on behalf of the underwriters, at its sole discretion, may waive the requirement to maintain a rating on the 8.50% 2028 Notes at any time.

 

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Form, Exchange and Transfer of Certificated Registered Securities

 

If registered Notes cease to be issued in book-entry form, they will be issued:

 

only in fully registered certificated form;

 

without interest coupons; and

 

unless we indicate otherwise, in denominations of $25 and amounts that are multiples of $25.

 

Holders may exchange their certificated securities for Notes of smaller denominations or combined into fewer Notes of larger denominations, as long as the total principal amount is not changed and as long as the denomination is equal to or greater than $25.

 

Holders may exchange or transfer their certificated securities at the office of the Trustee. We have appointed the Trustee to act as our agent for registering Notes in the names of holders transferring Notes. We may appoint another entity to perform these functions or perform them ourselves.

 

Holders will not be required to pay a service charge to transfer or exchange their certificated securities, but they may be required to pay any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holder’s proof of legal ownership.

 

We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts.

 

If any certificated securities of a particular series are redeemable and we redeem less than all the Notes, we may block the transfer or exchange of those Notes selected for redemption during the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to freeze the list of holders to prepare the mailing. We may also refuse to register transfers or exchanges of any certificated Notes selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any Note that will be partially redeemed.

 

If registered Notes are issued in book-entry form, only the depositary will be entitled to transfer and exchange the Notes as described in this subsection, since it will be the sole holder of the Notes.

 

Resignation of Trustee

 

The Trustee may resign or be removed with respect to the Notes provided that a successor trustee is appointed to act with respect to the Notes. In the event that two or more persons are acting as trustee with respect to different series of indenture securities under the Indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.

 

Indenture Provisions—Ranking

 

The Notes are our direct unsecured obligations and will rank:

 

pari passu with our other outstanding and future unsecured, unsubordinated indebtedness;

 

senior to any of our future indebtedness that expressly provides it is subordinated to the Notes. We currently do not have outstanding debt that is subordinated to the Notes and do not currently intend to issue indebtedness that expressly provides that it is subordinated to the Notes. Therefore, the Notes will not be senior to any indebtedness or obligations;

 

effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we have granted or subsequently grant security), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under our Encina Credit Facility. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes, and any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the Notes; and

 

structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries because the Notes are obligations exclusively of the Company and not of any of our subsidiaries. Structural subordination means that creditors of a parent entity are subordinate to creditors of a subsidiary entity with respect to the subsidiary’s assets. Upon issuance of the Notes, the Notes will be structurally subordinated to the SBA-guaranteed debentures;

 

The Trustee under the Indenture

 

U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association) serves as the Trustee under the Indenture.

 

 

15

 

 

Exhibit 21

 

SUBSIDIARIES OF SARATOGA INVESTMENT CORP.

 

Name   Jurisdiction
Saratoga Investment Funding II LLC   Delaware
Saratoga Investment Corp. SBIC, LP   Delaware
Saratoga Investment Corp. SBIC II LP   Delaware
Saratoga Investment Corp. SBIC III LP   Delaware
Saratoga Investment Corp. GP, LLC   Delaware

 

Exhibit 23.1 

 

Consent of Independent Registered Public Accounting Firm

 

We consent to the incorporation by reference of our report dated May 2, 2023, with respect to the consolidated financial statements of Saratoga Investment Corp. included in this Annual Report (Form 10-K) for the year ended February 28, 2023, into the Registration Statement (Form N-2, File No. 333-269186), filed with the Securities and Exchange Commission.

 

/s/ Ernst & Young LLP

 

New York, New York

May 2, 2023

 

Exhibit 23.2

 

 

 

Consent of Independent Auditors

  

We consent to the incorporation by reference in Registration Statement (No. 333-269186) on Form N-2 of Saratoga Investment Corp. of our report dated May 2, 2023 with respect to the statements of assets and liabilities, including the schedules of investments, as of February 28, 2023 and 2022, and the related statements of operations, changes in net assets, and cash flows for the years ended February 28, 2023, 2022 and 2021, and the related notes to the financial statements of Saratoga Investment Corp. CLO 2013-1, Ltd. included in this Annual Report (Form 10-K) of Saratoga Investment Corp. for the year ended
February 28, 2023.

 

/s/ CohnReznick LLP

 

Chicago, Illinois

May 2, 2023

 

 

 

 

Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

RULE 13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

 

I, Christian L. Oberbeck, certify that:

 

1. I have reviewed this Annual Report on Form 10-K of Saratoga Investment Corp.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

 

4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

 

5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 2, 2023 

 

  /s/ CHRISTIAN L. OBERBECK
  Christian L. Oberbeck
  Chief Executive Officer

 

 

Exhibit 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

RULE 13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

 

I, Henri J. Steenkamp, certify that:

 

1. I have reviewed this Annual Report on Form 10-K of Saratoga Investment Corp.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

 

4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

 

5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 2, 2023  /s/ HENRI J. STEENKAMP
  Henri J. Steenkamp
  Chief Financial Officer and Chief Compliance Officer

 

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report on Form 10-K of Saratoga Investment Corp. (the “Company”) for the annual period ended February 28, 2023, as filed with the Securities Exchange Commission on the date hereof (the “Report”), I, Christian L. Oberbeck, Chief Executive Officer of the Company, and I, Henri J. Steenkamp, Chief Financial Officer of the Company, each certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

 

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 2, 2023

 

  /s/ CHRISTIAN L. OBERBECK
  Christian L. Oberbeck
  Chief Executive Officer
   
  /s/ HENRI J. STEENKAMP
  Henri J. Steenkamp
  Chief Financial Officer and Chief Compliance Officer

 

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report on Form 10-K of Saratoga Investment Corp. (the “Company”) for the annual period ended February 28, 2023, as filed with the Securities Exchange Commission on the date hereof (the “Report”), I, Christian L. Oberbeck, Chief Executive Officer of the Company, and I, Henri J. Steenkamp, Chief Financial Officer of the Company, each certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

 

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 2, 2023

 

  /s/ CHRISTIAN L. OBERBECK
  Christian L. Oberbeck
  Chief Executive Officer
   
  /s/ HENRI J. STEENKAMP
  Henri J. Steenkamp
  Chief Financial Officer and Chief Compliance Officer