Saratoga Investment: Issues New Unsecured Notes

Keeping Busy

NEWS

On January 23, 2026, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with the Purchaser, which Note Purchase Agreement relates to the Company’s sale of $50,000,000 aggregate principal amount of the Notes to the Purchaser in a private placement in reliance on Section 4(a)(2) of the Securities Act. The Company is relying upon this exemption from registration based in part on representations made by the Purchaser. The Note Purchase Agreement also includes customary representations, warranties and covenants by the Company. The Notes have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration.

The Notes will mature on May 1, 2030 and may be redeemed in whole or in part at the Company’s option at any time prior to January 23, 2028 at par plus a “make-whole” premium, and thereafter at par. The Notes bear interest at a rate of 7.25% per year payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2026. The Notes are the Company’s direct unsecured obligations and rank: pari passu with the Company’s other outstanding and future unsecured, unsubordinated indebtedness; senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the Notes; effectively subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured in respect of which the Company has granted or subsequently grants 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.

The closing of the private placement occurred on January 23, 2026. The net proceeds from the sale of the Notes were approximately $48.5 million, based on an offering price of 99.117% per Note, after deducting the placement agent fee and estimated offering expenses of approximately $1.5 million, each payable by the Company. The Company intends to use the net proceeds to redeem the Company’s outstanding 4.375% Notes due 2026 and for general corporate purposes.Saratoga Investment – 8-K – January 27, 2026

Saratoga Investment (SAR) has a complicated balance sheet which includes two Revolvers, three SBIC licenses, each with debentures outstanding, and ten unsecured, either privately placed or publicly traded, unsecured notes (i.e. Baby Bonds). As a result, there are frequent changes as debt matures or is repaid early. The most recent new financing occurred a few days ago when SAR – as noted above – raised $50mn in unsecured notes due in 2030 from an unnamed institutional lender. The net proceeds will be used to repay an existing unsecured note whose final maturity date is only one month away and whose total balance is $175mn. In this article, we’ll estimate the impact on SAR’s earnings from this debt swap out and speculate as to how management might find the funds to repay the $125mn or so that still needs to be accounted for.AGENDA

So Long. Farewell.

Like so many other BDCs, SAR was able to issue unsecured notes at very low yields during the Zero Interest Policy, which ended early in 2022.

The BDC issued the $175mn in 2021 in two stages and paid a yield of only 4.375%.

Now with the notes maturing on February 28, 2026, SAR has to pay off this cheap debt.

(Curiously, the term of the new notes is less than 5 years – normally the standard).

Variance

SAR will be paying a premium of 2.875% on the $50mn just raised.

This means the BDC’s interest bill will increase by $1.4mn per annum.

We calculate that the incremental cost amounts to $0.09 per share per annum.

If we were to apply that differential over the full $175mn on a pro-forma basis, that would reduce SAR’s earnings before Incentive Fees by ($0.32) per share.

In the most recent quarter, annualized recurring earnings amounted to $2.96 per share.

Mo’ Money

Where will the remaining $125mn come from to fully pay off the 2026 notes?

There are multiple potential sources, and some combination may be needed.

SAR could go and issue one or more unsecured notes, but that seems unlikely given the proximity of the payoff of the existing debt and this just-completed issuance.

The BDC has a sizable amount of cash on its balance sheet that could be tapped.

There are two Revolvers, each with substantial unused borrowing capacity.

Finally, for all we know, SAR may have received net proceeds since November 2025 from repayments and asset sales that might supplement the cash already available and be applied to the debt repayment.

This would reduce the company’s leverage, which has been trending of late.

VIEWS

Choices

SAR has chosen to fund itself principally with unsecured debt and to use more leverage than most other BDCs.

The consequence is that the BDC is constantly issuing and redeeming large chunks of medium-term junior debt capital as we are witnessing right now.

Thankfully, the market is open to SAR, and the BDC has minimized its risk by some “laddering” of its obligations.

The BDC also benefits from having performed very well in credit terms in recent quarters after suffering three significant setbacks in 2024.

As a result, we do not doubt that SAR will be able to comfortably refinance its 2026 unsecured notes as needed.

However, until the BDC can start prepaying some of its very expensive unsecured notes at a lower rate, its interest expense bill will remain high.

It’s no surprise that SAR’s most recent interest expense was greater than its incentive income.

An under-leveraged BDC like MSC Income Fund (MSIF)- by contrast – is earning twice its interest expense.