July 8, 2026
Background
On July 7, 2026, Saratoga Investment (SAR) kicked off the IIQ 2026 earnings season by reporting results through May 2026 and publishing its 10-Q. Today, the managers of the lower-middle market BDC held their conference call.
Got To Work
The BDC Reporter has fired up the BDC Performance Table and updated the latest SAR metrics. Included therein is our rating of the BDC for the period on our 1-to-5 scale, where a 1 denotes outperformance against expectations, a 2 is in line with expectations, and 3 through 5 signify increasing degrees of underperformance.
For a second period in a row, SAR receives a rating of 4.
We've also written a paragraph about SAR, summarizing its main results and explaining the reasons for the performance valuation. These can be found for each BDC, each quarter, in the Individual BDC Performance Table. Here is this quarter's write-up:
"For a second quarter in a row, Saratoga Investment's (SAR) quarterly financial performance receives a 4 rating, reflecting weak results both in terms of earnings and book value. Regarding the former, the analyst consensus was for Adjusted Net Invest Income Per Share (ANIIPS) of $0.54, slightly higher than the disappointing $0.53 achieved in the prior quarter. Instead, actual ANIIPS came to a new low of $0.47, notwithstanding a modest increase in portfolio size. Not helping has been a lower portfolio yield as some higher-interest loans rolled off and have been replaced by new debt at thinner spreads. Moreover, like many BDCs, SAR had to refinance inexpensive unsecured medium-term notes with much more expensive new debt, which increased its interest expense. Recurring earnings now account for 63% of the dividend. Net Asset Value Per Share (NAVPS) fell to $23.23, or (4.9%). The latest NAVPS is the lowest since we began keeping records in 2020, and the second quarter in a row of a material downturn. Part of the decline can be attributed to the difference between recurring earnings and the dividend. However, unrealized write-downs at Pepper Palace and new Important Underperformer Exigo also contributed. There are now two software companies we're worrying about in the portfolio. The only reason SAR does not get our lowest rating is that non-accruals at cost and FMV remain very low, and overall the portfolio is performing decently from that perspective".
Where To?
Based on our assessment of the latest results, the BDC Reporter has updated its Investment View on SAR, as shown in the BDC Best Ideas Table.
As before, SAR is a DON'T BUY, even as the stock has lost more than a tenth of its value in a few hours.
Here is what we wrote:
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Saratoga Investment (SAR) had performed very well in recent years where fundamentals are concerned and had been a BDC Best Idea for a long time. However, in the last couple of quarters that trend has reversed. Earnings have softened, falling (23%) in 6 months and off (31%) from 12 months ago, hurt by lower rates, thinner spreads and a higher cost of borrowing unsecured. Given that the BDC has continued to pay a dividend way in excess of its earnings by using up undistributed prior income, Net Asset Value Per Share (NAVPS) has declined as well. Adding to the misery, there have been a couple of significant write-downs of portfolio companies, most notably Exigo in the latest quarter. There are now two SaaS companies in trouble in the 50-company portfolio, along with non-accrual Pepper Palace and the BDC's own CLO vehicle. Management bats back concerns about the BDC's high leverage (more than 2x its net assets) by pointing to its reliance on medium-term unsecured financing, but it still has us worried because leverage is a knife that cuts both ways. The just announced poor IIQ 2026 results have knocked SAR for a loop - off more than (10%) - but we worry that more trouble may lie ahead, as well as the mother of all dividend reductions. The stock trades just under $18 as we write this, but could go below $15.0. SAR is a DON'T BUY.
Last Word
We feel conflicted about stamping SAR as a DON'T BUY because we have the highest regard for its management and the excellent job they've done since gaining control of the BDC back during the GFC. As the BDC itself mentions on every conference call and every Investment Presentation, SAR has outperformed most of its peers in terms of returns; generated a higher return on equity, and maintained an unusually clean credit record since booking three setbacks nearly two years ago.
However, we all need to look forward when investing, and the short-term future does not look very promising. Moreover, we are in a period when markets are unforgiving, as was evident today when the stock price melted down.
Sometimes, when a fundamentally well-run BDC gets into a spot of trouble, one has to step aside for a period and check in regularly rather than sticking. We can see ourselves buying back into SAR one day, a statement that we cannot make for every BDC.
By the way, we are still constructive on SAR's multiple Baby Bonds, two of which we hold in the BDC Best Ideas portfolio. One of those bonds was up in price today, and one was down, but both moved only modestly.
