Saratoga Investment Corp. (NYSE: SAY)

Saratoga Investment Corp is a specialty finance company that provides customized financing solutions to U. S. middle-market businesses. The firm focuses on generating current income and long-term capital appreciation through investments in senior and unitranche leveraged loans, mezzanine debt, and equity issued by private U. S. middle-market companies with annual EBITDA between $2 million and $50 million. Its investment activities include direct lending and participation in loan syndicates to support change of ownership transactions, strategic acquisitions, recapitalizations, and growth initiatives in partnership with business owners, management teams, and financial sponsors. The company is 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.

Saratoga Investment Corp generates revenue primarily through interest income from its debt investments, dividend income from equity holdings, and fees related to investment structuring and management. The company earns returns by investing in leveraged loans, mezzanine debt, and equity securities of middle-market companies, which provide financing for various corporate purposes such as acquisitions, growth initiatives, and balance sheet recapitalizations. Revenue is derived from the performance of its investment portfolio, including cash interest payments, payment-in-kind interest, and realized gains upon the sale or maturity of investments. The firm also earns income from joint ventures and structured finance vehicles, such as its investments in collateralized loan obligation funds and the Saratoga Senior Loan Fund joint venture.

The company operates through the following segments:

• Leveraged Loans: This segment includes investments in first lien and second lien term loans issued by middle-market companies. First lien term loans are senior debt instruments secured by a first priority perfected security interest on all or substantially all of the borrower’s assets and typically include a first priority pledge of the borrower’s capital stock. These loans generally offer floating rate interest payments, have a stated maturity of five to seven years, and feature fixed amortization schedules with restrictive financial and negative covenants. Second lien term loans are secured by a second priority perfected security interest on the borrower’s assets and typically include a second priority pledge of the capital stock. They offer either floating 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 lack fixed amortization schedules require principal repayment at maturity and have less restrictive financial and negative covenants than first lien loans.

• Mezzanine Debt: This segment consists of unsecured and subordinated debt investments that rank below senior debt but above common and preferred equity in the borrower’s capital structure. Mezzanine debt typically has fixed rate interest payments, a stated maturity of six to eight years, and does not feature fixed amortization schedules. In some cases, a portion of the interest payable may be structured as payment-in-kind interest, which increases the principal amount of the obligation by the amount of interest due.

• Equity Investments: This segment involves equity investments in middle-market companies, which may include preferred equity expected to pay dividends in cash or additional equity, or preferred equity that does not pay current dividends. Preferred equity generally has a preference over common equity in liquidation and dividend distributions. The company may also acquire common equity, though its equity investments are typically not control-oriented and are often made as part of a group of private equity investors where it is not the lead investor.

• Opportunistic Investments: This segment includes investments made to enhance returns, representing up to 30.0% of the portfolio. Such investments may include distressed debt, including securities of companies in bankruptcy, private equity, securities of public companies that are not thinly traded, joint ventures, and structured finance vehicles such as collateralized loan obligation funds. The company may also invest in foreign debt and equity of middle-market companies located outside the United States. Although it has no current intention to invest in private equity funds, it limits such investments to no more than 15% of net assets if pursued, due to regulatory constraints under the Investment Company Act of 1940.

Saratoga Investment Corp operates in the competitive landscape of middle-market financing, facing competition from public and private investment funds, including private equity funds, mezzanine funds, business development companies, and small business investment companies, as well as commercial and investment banks, commercial financing companies, and alternative investment vehicles such as hedge funds. Many middle-market companies remain underserved by traditional large financial institutions due to regulatory constraints like Basel III, which limit these institutions’ capacity to hold non-investment grade leveraged loans on their balance sheets. The company believes its competitive advantages stem from its externally managed structure, the experience of its investment adviser Saratoga Investment Advisors, and its affiliation with Saratoga Partners, which provides access to a network of relationships with commercial and investment banks, commercial finance companies, and financial sponsors. Its investment committee, composed of four principals with extensive leveraged finance experience, unanimously approves all investments exceeding $1.0 million, ensuring disciplined underwriting. The firm also benefits from its ability to source investments in both primary and secondary markets and its focus on companies with stable earnings, strong free cash flow, sustainable enterprise values, reasonable debt-to-cash flow multiples, experienced management teams with meaningful equity ownership, industry leadership, and appropriate capital structures with reasonable covenants.

Saratoga Investment Corp serves private U. S. middle-market companies across various industries that require financing for change of ownership transactions, strategic acquisitions, recapitalizations, and growth initiatives. The company partners with business owners, management teams, and financial sponsors to provide tailored financing solutions. While specific customer names are not disclosed in the filing, the firm’s portfolio consists of investments in 48 portfolio companies as of February 28, 2025, excluding certain investments in collateralized loan obligation funds and joint ventures. These portfolio companies represent the end recipients of the company’s financing activities and are defined as businesses with annual EBITDA between $2 million and $50 million.