Saratoga Investment (NYSE:SAR) reported fiscal second-quarter 2027 adjusted net investment income of $7.4 million, or $0.46 per share, as portfolio growth and a modest increase in base rates were offset by higher borrowing costs following recent refinancing activity.
Adjusted NII per share declined from $0.47 in the prior quarter and $0.58 a year earlier. The company said the quarter ended August 31, 2026, and noted that its fiscal year ends February 28.
Portfolio marks pressure NAV
Net asset value per share declined to $22.15 from $23.23 in the prior quarter and $25.61 a year earlier. Oberbeck said the $1.08 sequential reduction included $0.82 per share tied to performance in three portfolio credits and $0.30 per share from dividends exceeding net investment income. Share repurchases contributed $0.09 per share of NAV accretion.
The company repurchased approximately 444,000 shares during the quarter at a discount to NAV. Saratoga said the repurchases totaled $8.4 million and reduced total NAV while increasing NAV per share.
Saratoga’s $1.15 billion portfolio was marked down by $14.4 million during the period. The non-CLO core portfolio had net depreciation of $15.4 million, driven primarily by markdowns in Exigo, Chronus and Madison Logic. The company also cited equity conversions involving Gen4 and Modis, which resulted in a $1.5 million reversal of previously recognized unrealized appreciation.
Those declines were partly offset by $4.5 million of unrealized appreciation in Zollege. Saratoga recognized $2.1 million of realized gains during the quarter, primarily related to the Gen4 and Modis dental equity conversions.
Chief Operating Officer David DeSantis said Exigo was marked down by $8.7 million as its customers faced competitive pressure from alternative sales channels, contributing to customer churn and a shrinking end market. Saratoga subsequently exited Exigo near its quarter-end mark, resulting in a negative 6.1% internal rate of return over the life of the investment, DeSantis said.
Chronus was marked down by $2.5 million amid lower customer retention and slower new-customer acquisition, while Madison Logic was marked down by $1.9 million due to declining sales and market softness. Both investments remained on accrual status and had sufficient cash balances, according to DeSantis.
Saratoga said its core non-CLO portfolio was valued 1.6% below cost at quarter-end, while the total portfolio was valued 4.9% below cost. The portfolio was 81.5% invested in first-lien debt.
Non-accruals resolved after quarter-end
At quarter-end, Saratoga reported non-accruals representing 1.3% of cost, consisting of Pepper Palace and a CLO F-Note investment. Both had been fully written down at fair value.
After the quarter closed, Pepper Palace was sold for a nominal amount and the CLO F-Note was realized at zero value in connection with a CLO refinancing. Management said Saratoga therefore had no non-accrual investments following those transactions.
DeSantis said the company’s existing software portfolio had a 43% loan-to-value ratio, with 85% of positions in first-lien debt and another 6% in equity securities. He said Saratoga expects its deal flow and portfolio to shift substantially away from software, citing a high hurdle for new software investments amid industry concerns about AI-related disruption.
Management said the challenges at Chronus and Madison Logic were not materially related to AI. DeSantis said Chronus was incorporating AI into its products and that Saratoga had not seen a meaningful competitive impact from AI at either company.
Refinancing and liquidity initiatives
Saratoga issued $85 million of SAX baby bonds during the quarter. Following the exercise of the underwriters’ overallotment option and a reopening of the offering after quarter-end, total SAX issuance reached approximately $120.8 million.
The proceeds helped the company redeem $105.5 million of 6.00% notes due in 2027 on September 18, reducing its near-term refinancing risk. Management said the company used all quarter-end cash and proceeds from the SAX offering’s overallotment option in the redemption.
The company also refinanced its Saratoga CLO after the quarter ended. The transaction reset approximately $350 million of assets, extended the CLO’s reinvestment period through October 2029 and its legal maturity through October 2037, and established a non-call period through April 2028. Saratoga said the refinanced CLO carries lower financing rates and is expected to support future management fee and interest income.
At quarter-end, Saratoga reported $211 million of available investment capacity, including $121 million available through its SBIC III license and $90 million through revolving credit facilities. The Small Business Administration approved a $75 million increase to SBIC III’s leverage limit, raising the limit to $250 million.
Chief Financial and Chief Compliance Officer Henri Steenkamp said approximately 85% to 90% of the company’s deal flow is SBIC eligible. He said SBIC financing becomes the company’s preferred capital source after balance-sheet cash is used because it offers its highest margin.
Dividend, market outlook and leadership transition
Saratoga declared a monthly base dividend of $0.25 per share for each month of the fiscal third quarter, or $0.75 per share in aggregate. The company said the annualized dividend represented an 18.1% yield based on its October 5 stock price of $16.61.
Management said the board will continue evaluating the dividend at least quarterly, taking into account earnings, interest rates, the macroeconomic environment and spillover income. Steenkamp said spillover income had declined to about $1 per share as of August 31.
Oberbeck said management expects earnings to improve as the company deploys capital, benefits from the CLO reset and potentially sees broader private-credit spreads adjust. He also said each 25-basis-point increase in rates would raise quarterly interest income by approximately $0.033 per share.
Separately, Oberbeck said Steenkamp will step down from his executive roles on October 31 for health reasons after nearly 13 years with the company. Steenkamp will remain a Saratoga director, continue as CFO of the company’s SBICs and provide consulting support. Saratoga promoted Christine Ramdihal to chief accounting officer and treasurer.
About Saratoga Investment (NYSE:SAR)
Saratoga Investment Corporation (NYSE:SAR) is a business development company that provides financing to lower middle-market companies in the United States. The company seeks to support businesses that may have limited access to traditional bank financing, working with private equity sponsors, management teams and other financial partners.
Through its investment portfolio, Saratoga Investment typically provides senior secured and subordinated debt, including first-lien, unitranche and second-lien loans, as well as mezzanine financing and equity investments.
