Saratoga Investment Fiscal Q2 2027 Earnings: AUM Growth Contrasts with NAV Decline

Saratoga Investment (NYSE: SAR) reported fiscal Q2 2027 total investment income of $31.2 million, up 2.0% year over year, while diluted EPS swung to a loss of $0.41 from earnings of $0.84. For the quarter ended August 31, 2026, portfolio growth supported investment income, but higher financing costs and credit-specific valuation markdowns pressured net investment income and NAV.

Core Financial Results

Total investment income increased as the full-quarter contribution from fiscal Q1 originations and the partial-quarter contribution from new fiscal Q2 investments more than offset repayments. However, total operating expenses rose 10.8%, including higher interest and debt financing expenses and base management fees.

GAAP net investment income declined 19.6% to $7.3 million. The company recorded a $14.0 million net realized and unrealized investment loss, compared with a $4.2 million gain a year earlier, resulting in a $6.7 million decrease in net assets from operations.

Adjusted NII is a non-GAAP measure. For fiscal Q2 2027, it excluded approximately $122,810, or $0.01 per share, of interest on the new 8.00% notes during the period when the 6.00% notes remained outstanding.

Portfolio and Investment Activity

Assets under management reached $1.150 billion, increasing 2.1% from the preceding quarter and 15.6% from a year earlier. Saratoga originated $76.1 million of investments, including two new portfolio companies and nine follow-on investments, while repayments totaled $39.0 million. This produced $37.1 million of net originations; approximately $9.2 million of originations consisted of BB- and BBB-rated CLO debt investments.

The portfolio remained concentrated in senior debt, with first-lien term loans representing 81.5% of fair value. The weighted average current portfolio yield was 9.9%, while the core BDC portfolio’s weighted average interest rate was 10.6%, up from 10.5% sequentially but below 11.3% a year earlier.

At quarter-end, non-accrual investments represented 0.0% of portfolio fair value and 1.3% of cost because Pepper Palace and the CLO F-Note were carried at zero fair value. Both investments were sold after quarter-end, eliminating the remaining non-accrual positions. The core BDC portfolio was marked 1.6% below cost, while the total portfolio was 4.9% below cost.

AUM Growth Did Not Prevent a NAV Decline

Despite higher AUM and positive net originations, NAV fell $25.9 million, or 6.8% sequentially, to $352.6 million. NAV per share declined 4.6% from $23.23 to $22.15, principally because of unrealized investment depreciation and dividends exceeding quarterly net investment income.

The portfolio recorded $14.4 million of net realized gains and unrealized depreciation. The non-CLO portfolio had $15.4 million of net depreciation, led by $13.1 million of markdowns in Madison Logic, Exigo and Chronus. A $1.5 million reversal of previously recognized appreciation related to Gen4 and Modis also weighed on valuations, while $4.5 million of appreciation in Zollege provided a partial offset. Saratoga separately recorded $2.1 million of realized gains, primarily from the Gen4 and Modis Dental equity conversions.

The $0.75 quarterly dividend exceeded GAAP NII of $0.45 per share and adjusted NII of $0.46 per share. Management attributed $0.30 per share of the sequential NAV-per-share decline to distributions above earnings. Saratoga also repurchased 444,124 shares for approximately $8.4 million at an average price of $18.91; the repurchases reduced total NAV dollars but were accretive to NAV per share because they occurred below NAV.

Profitability, Cash Flow and the Balance Sheet

Core non-CLO net interest margin increased by $0.2 million sequentially to $13.6 million. Higher average core assets and a five-basis-point increase in the average SOFR rate helped, but new originations carried spreads 220 basis points below those of the investments they replaced. Higher interest expense following changes to the capital structure also limited the benefit from portfolio growth.

Interest and debt financing expenses increased to $14.1 million from $12.4 million a year earlier, while base management fees rose to $5.1 million from $4.4 million as AUM expanded. These increases explain why investment income growth did not translate into higher NII.

Quarter-end cash and cash equivalents, including reserve accounts, increased sequentially from $60.8 million to $95.9 million. Saratoga had $902.4 million of outstanding borrowings and issued $85.0 million of 8.00% notes due 2031 during the quarter. Subsequent issuances increased the total principal amount to approximately $120.8 million, and the proceeds helped fund the post-quarter redemption of $105.5 million of 6.00% notes due 2027. The refinancing reduced near-term maturity risk but raised financing costs.

Management’s View

Management characterized private credit conditions as competitive and uneven, citing inflation, interest-rate volatility, geopolitical uncertainty and possible AI-related disruption in software. It said the quarter’s NAV decline was concentrated in a limited number of company-specific credits rather than reflecting broad deterioration across the portfolio.

The company plans to remain selective in deploying capital. Management also pointed to improving M&A activity and firmer values for higher-quality loans as signs of stabilization, while acknowledging continued cautious sentiment across private credit markets.

Risks Investors Need to Watch

• Credit-specific valuation pressure: Madison Logic, Exigo and Chronus accounted for $13.1 million of quarterly markdowns. Additional deterioration in concentrated positions could further reduce NAV and EPS.
• Financing costs and spread compression: Interest expense increased while spreads on new originations were 220 basis points below those on repaid investments. Continued pressure on this relationship could constrain NII even if AUM grows.
• Dividend coverage: The $0.75 quarterly distribution remained above both GAAP and adjusted NII per share. A persistent gap would continue to reduce NAV or previously undistributed earnings.
• Leverage and liquidity commitments: Saratoga reported $902.4 million of borrowings, while much of its quarter-end cash was allocated to redeem the 2027 notes. It also had $120.0 million of committed undrawn lending commitments and $61.1 million of discretionary commitments.

Summary

Saratoga Investment expanded AUM and generated positive net originations in fiscal Q2 2027, lifting total investment income modestly. Those gains were outweighed by higher financing and management costs, markdowns concentrated in several portfolio companies and a dividend above quarterly NII, resulting in lower NAV and a GAAP loss. The next key indicators are credit valuations, the effect of the refinanced debt structure on NII and whether portfolio income can move closer to covering the dividend.