Saratoga Investment Corp. (SAR) Q2 2027 earnings review
Saratoga's loan book grows, but profit misses its dividend
Saratoga Investment's loan book is growing again, but its earnings still cannot cover the payout. Total investment income grew slightly from a year ago as the company deployed more capital. However, higher borrowing costs pushed profit excluding one-offs down to $0.46 per share, far below the dividend, draining cash from the business.
| Profit per share, excluding one-offs | $0.46 $0.58 a year ago |
|---|---|
| Net asset value per share | $22.15 $25.61 a year ago |
| Assets under management | $1.15 billion $995 million a year ago |
| Q3 dividend outlook | Unchanged $0.75 per share |
⚖️ Verdict: 🔴 Bearish
The story got worse because the persistent dividend gap and new loan markdowns are destroying book value. The company did clear its worst problem loans from the books by selling them after the quarter ended, and it bought back shares at a discount. But paying out more than it earns cost the company $0.30 per share in net asset value this quarter alone.
The question now is when the company will be forced to cut the dividend. It is funding the shortfall using a shrinking pile of past profits; a cut becomes a mathematical certainty when that pile runs dry. The size of the reserve next quarter will show how much time is left.
🐂 Bull Case
Non-accrual Loans Leave the Books
Saratoga had two troubled investments, Pepper Palace and a loan obligation note, sitting at zero value on its books. It also held a struggling software loan called Exigo.
The company sold the note and Pepper Palace after the quarter ended, dropping loans that do not pay interest to zero percent of fair value. It also sold Exigo for $8 million.
The sales remove the worst credit risks from the portfolio. The exit eases a standing concern about the quality of the consumer and software loans.
What to watch: next quarter's credit marks, to see if new loans take their place on the troubled list.
Share Repurchases Recover Some Value
Saratoga's stock trades below the value of its underlying assets. The company has a program to buy back those discounted shares from the open market.
Management bought 444,124 shares at an average price of $18.91, paying much less than the previous quarter's $23.23 net asset value.
Retiring those shares cheaply added $0.09 per share back to the net asset value. By our math, that covers nearly a third of the value the company lost by overpaying its dividend this quarter.
What to watch: the share count next quarter, to see if the company keeps buying back stock at these prices.
🐻 Bear Case
Profit Still Misses the Dividend
Saratoga pays a $0.75 quarterly dividend. Chief executive Christian L. Oberbeck said the payout continues a track record of "strong dividend distributions" while "offering strong current income."
Profit excluding one-offs, the cash available to pay that dividend, fell to $0.46 per share. It is the seventh straight quarter the company has not earned its payout.
The shortfall contradicts the company's confident framing. Paying $0.75 while earning $0.46 drains $0.29 per share directly from the net asset value. The company covers the gap using a shrinking reserve of past profits.
What to watch: the undistributed profit reserve next quarter. A smaller reserve brings a dividend cut closer.
Specific Loans Erase Book Value
Saratoga adjusts the value of its loans every quarter to reflect market conditions and borrower performance.
The company lowered the value of three loans — Madison Logic, Exigo and Chronus — by a combined $13.1 million.
These specific write-downs erased $0.82 per share from the net asset value. That drop compounded the dividend shortfall, pushing the total book value down nearly 5% in three months.
What to watch: the fair value of the core portfolio next quarter, to see if new company-specific problems emerge.
👓 Other Themes
Expensive Bonds Replace Cheap Debt
Saratoga borrows money to fund its loans. When old debt matures, the company must issue new debt at current market rates.
The company issued $85 million in new bonds paying 8% interest to replace older bonds that paid 6%.
The higher rate pushes up costs. Interest and debt financing expenses jumped 4.7 percentage points to 45.1% of revenue from a year ago by our math. That extra cost is why adjusted profit fell even as the loan book grew.
💲 Other KPIs
Fell for a fourth straight quarter, dropping 4.6% from May. The net asset value is the total worth of the company's assets minus its debts, divided by its shares. Loan markdowns and the large dividend drove the drop, despite a slight boost from share repurchases.
The loan book grew 2.1% from last quarter and 15.6% from a year ago. Saratoga added two new portfolio companies and funded nine follow-on investments, deploying $76 million while receiving $39 million in repayments.
🔮 Guidance
Held. The board declared three monthly dividends of $0.25 each for the third quarter. The company continues to hold the payout steady even as its underlying earnings sit well below it. It relies on a shrinking reserve of undistributed past profits to fund the difference.
❓ Key Questions
When will the company call its 8% notes?
The company refinanced its 6% debt at 8% this quarter, but left other 8% callable baby bonds outstanding. Calling them could lower borrowing costs.
What is the exact remaining spillover balance?
The balance dictates exactly how many quarters the company can keep paying the $0.75 dividend out of past profits before a cut becomes mandatory.
Are there further software loans at risk?
Management previously stated it is shifting away from software lending, but legacy software loans like Exigo and Chronus drove the recent wave of markdowns.