The reason the SBIC business is a valuable competitive advantage for Saratoga is because most other BDCs are too big for such a program to make a difference. However, because Saratoga is relatively small (its market capitalization is only $112 million) the program provides access to very attractive capital in amounts that are significant enough to move Saratoga’s needle. Said differently, it’s a great business for Saratoga to be in.
Lots of Dry Powder:
Another competitive advantage is Saratoga’s ability to grow its assets under management by 42% without any external capital. This sets Saratoga apart relative to its BDC peers as shown in the following chart.
For more color, the following table shows Saratoga’s current borrowing capacity and available liquidity.
Saratoga Investment Corp (NYSE:SAR) has more capacity to fund growth under its Secured Revolving Credit Facility, SBA Debentures, and Cash and Cash Equivalents. Specifically, Saratoga benefits from its low-cost 10-year fixed SBA debentures and fixed cost covenant-free baby bonds.
Quality Portfolio:
Another competitive advantage is the high quality of Saratoga’s loans, which is something many other BDCs do not enjoy. For example, over 99% of Saratoga’s loan investments have the highest quality internal credit rating (this was not the case when Saratoga took over the BDC in 2010), and Saratoga currently has zero loans in non-accrual. During our recent call, Saratoga’s CFO Henri Steenkamp explained:
“We’re not afraid to not grow in a quarter, our most important thing is not to sacrifice credit quality.”
This quote helps explains all the “dry powder” (quality over quantity) and the attractive quality of having zero loans in non-accrual.
Risks:
Rising Interest Rates:
Saratoga faces many of the same big risks as other BDCs, such as rising interest rates. However, Saratoga may be less impacted than some of its peers because of the way its balance sheet is structured. For example, all of Saratoga’s outstanding liabilities are fixed rate (for example, the SBA debentures are 10-year fixed rate). The only piece that would rise with interest rates is the credit facility ($0 outstanding), and rates must go up 125bps before that moves. And on the asset side, only ~18% is fixed (a good thing). However, ~60-70% of assets have floors. Essentially, on the asset side the first 100bps makes no difference versus the first 125bps making no difference on the liabilities side, and the liabilities piece is much smaller than the assets. Overall, as long as rising rates don’t significantly slow business, Saratoga is in good shape if/when rates rise.
Less Banking Regulation:
Another BDC industry-wide risk is the possibility of less banking regulation. In particular, President Obama’s administration has aggressively pursued banks in the form of lawsuits and more regulations that prohibited risk taking as shown in the following charts.
