Saratoga Investment Corp. (NYSE: SAR) reported a sharp decline in fiscal second-quarter net asset value as portfolio write-downs outweighed realized gains, even as the business development company expanded its investment portfolio to a record $1.15 billion and maintained low non-accrual levels.
For the quarter ended August 31, 2026, net asset value fell 6.8% from the prior quarter to $352.6 million. NAV per share declined 4.6% to $22.15 from $23.23, reflecting $14.4 million of net realized gains and unrealized losses as well as quarterly dividend payments. The company also repurchased about $8 million of shares during the period.
Saratoga recorded GAAP net investment income of $7.3 million, or $0.45 per share, compared with $7.6 million, or $0.47 per share, in the preceding quarter. Adjusted net investment income was $7.4 million, or $0.46 per share, down from $0.47 per share, while the adjusted NII yield increased to 8.1% from 7.8%. The adjusted figures excluded accrued capital-gains incentive fee expense and overlapping interest expense related to a debt refinancing.
Last-12-month return on equity dropped to negative 1.1% from 4.0% in the first quarter, below the presentation’s BDC industry average of 2.2%. Saratoga said the latest result reflected discrete portfolio write-downs. Its average ROE over the past 12 years was 9.2%, compared with an industry average of 6.4%.
Portfolio marks offset asset growth
Net depreciation in Saratoga’s core non-CLO portfolio totaled $15.4 million. Of that amount, $13.1 million related to declines in Madison Logic, Exigo and Chronus. The quarter also included a $1.5 million reversal of previously recognized unrealized appreciation associated with equity conversions at Gen4 and Modis, as well as lower valuation multiples on certain equity holdings and the effect of changing market spreads.
Those pressures were partly offset by $4.5 million of unrealized appreciation in Zollege and $2.1 million of net realized gains, primarily from the Gen4 and Modis Dental equity conversions. Saratoga also recorded a $1.1 million write-down in its joint venture.
The investment portfolio’s fair value increased 2.1% sequentially and 15.6% year over year to $1.150 billion. The total portfolio was valued 4.9% below cost, while the core non-CLO BDC portfolio was 1.6% below cost.
New originations totaled $76.1 million, partly offset by $39.0 million of repayments. Activity included two new non-software investments, nine follow-on investments and four CLO BB or BBB debt investments. Saratoga said its pipeline remained healthy, with 761 deals sourced and 60 new or follow-on investments executed during the latest calendar 12-month period presented.
Credit metrics remained comparatively stable despite the write-downs. About 96.0% of Saratoga’s loan investments carried its highest internal rating. Two investments were on non-accrual at quarter-end, representing no fair value and 1.3% of cost, compared with a cited BDC industry average of 3.4% of cost. Pepper Palace and the CLO F Note remained marked at zero and on non-accrual at quarter-end; both were sold after the period closed.
First-lien investments accounted for 81.5% of portfolio fair value. The weighted average current yield on the total existing portfolio was 9.9%, and approximately 99% of the company’s loans had floating interest rates, with prevailing rates above their floors.
Liquidity supports further deployment
Saratoga ended the quarter with $211.0 million of available liquidity, which it said could support an 18% increase in assets under management without additional external financing. The company issued $85 million of 8.00% fixed-rate notes due August 2031 and subsequently used the proceeds, together with additional financing, to repay $105.5 million of 6.00% notes in September 2026.
After quarter-end, Saratoga drew an additional $46 million of SBIC III debentures. The Small Business Administration also approved a $75 million increase in capacity, leaving $175 million outstanding and $75 million available under that funding source, according to the presentation.
The company declared an aggregate dividend of $0.75 per share for the quarter ending November 30, 2026, payable in three monthly installments of $0.25. The quarterly rate was unchanged from the comparable prior-year period. Adjusted NII of $0.46 per share for the reported quarter was below the $0.75 quarterly distribution rate.
Management’s stated priorities include expanding the asset base without sacrificing credit quality, adding investment-management capacity and deploying available financing to increase scale. Key constraints identified in the presentation include portfolio valuation changes, lower equity-market multiples, changing credit spreads, base-rate reductions and spread compression. Saratoga’s last-12-month net interest margin declined 4% year over year to $58.3 million, which the company attributed to spread compression, lower base rates and capital-structure refinancings.
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