Stock Analysis & Valuation Saratoga Investment Corp 6.00% (SAT)

• Previous Close: $24.92
• Sector Valuation Confidence Level: High

Valuation method	Value, $	Upside, %
Artificial intelligence (AI)	284.89	1043
Intrinsic value (DCF)	15.49	-38
Graham-Dodd Method		n/a
Graham Formula	84.77	240

Strategic Investment Analysis

Company Overview

Saratoga Investment Corp (NYSE: SAR) is a specialty finance company focused on providing leveraged loans and mezzanine debt to U.S. middle-market companies. Operating as a business development company (BDC) under the Investment Company Act of 1940, Saratoga Investment Corp plays a critical role in financing small and mid-sized businesses that may have limited access to traditional capital markets. The company generates revenue through interest income from its debt investments and capital gains from equity positions. With an SBIC-licensed subsidiary, Saratoga benefits from advantageous leverage terms, enhancing its ability to deploy capital efficiently. The BDC model allows retail investors to gain exposure to private credit markets typically reserved for institutional investors. Saratoga's focus on middle-market lending positions it in a high-growth segment of the financial services industry, where demand for flexible financing solutions remains strong. The company's diversified portfolio across industries mitigates sector-specific risks while providing stable cash flows to support its attractive dividend yield.

Investment Summary

Saratoga Investment Corp offers investors exposure to the growing middle-market private credit space with a current dividend yield supported by its interest income from leveraged loans. The company's SBIC license provides favorable financing terms, enhancing returns. However, as a BDC, Saratoga carries inherent risks including credit risk from its loan portfolio and interest rate sensitivity. The company's low beta suggests relative stability compared to broader markets, but its high leverage ratio (total debt of $730.6M against market cap of $377M) warrants caution. With diluted EPS of $2.02 and a $1.50 dividend, payout coverage appears adequate, though investors should monitor portfolio quality and default rates. The BDC structure provides tax advantages but requires 90% income distribution, limiting retained earnings for growth.

Competitive Analysis

Saratoga Investment Corp competes in the middle-market direct lending space, differentiating itself through its SBIC-licensed subsidiary which provides access to low-cost, government-guaranteed leverage. This structural advantage allows Saratoga to achieve better spreads on its loans compared to non-SBIC competitors. The company focuses on unitranche and first lien senior secured loans, positioning itself as a relatively conservative lender within the BDC space. Saratoga's small size ($377M market cap) enables nimble deal sourcing but limits its ability to participate in larger syndicated deals that bigger BDCs can access. The company's portfolio diversification across multiple industries mitigates concentration risk, though its middle-market focus means borrowers may have higher default risk than larger corporate credits. Saratoga's competitive positioning relies on its ability to source proprietary deals and maintain strong underwriting standards in a competitive lending environment where larger BDCs and private credit funds are increasingly active. The company's 6% notes (ticker: SAT) represent a more senior part of its capital structure compared to its common equity, offering investors different risk/return profiles within Saratoga's financing ecosystem.

Major Competitors

• Ares Capital Corporation (ARCC): As the largest BDC by assets, Ares Capital benefits from scale advantages in deal sourcing and syndication. Its strong sponsor relationships give it access to high-quality deal flow, but its size may limit returns on smaller middle-market deals where Saratoga competes. Ares has more diversified funding sources but lacks an SBIC license.
• FS KKR Capital Corp (FSK): FS KKR combines the resources of KKR's global platform with focused middle-market lending. Its larger scale allows participation in bigger deals but may reduce focus on the smaller end of the middle market where Saratoga operates. FSK has higher leverage capacity but more exposure to cyclical industries.
• Golub Capital BDC (GBDC): Golub Capital specializes in middle-market lending with a focus on sponsor-backed transactions. It has strong underwriting capabilities similar to Saratoga but operates at a larger scale. Golub's lower cost of capital gives it pricing advantages, though Saratoga's SBIC license helps narrow this gap.
• BlackRock TCP Capital Corp (TCPC): TCPC focuses on middle-market companies with EBITDA between $25-150 million, overlapping with Saratoga's target market. BlackRock's affiliation provides brand recognition and deal flow advantages, but TCPC lacks SBIC financing benefits that Saratoga enjoys.
• Prospect Capital Corporation (PSEC): Prospect Capital has a similar middle-market focus but employs more aggressive strategies including CLOs and real estate lending. This creates higher yield potential but also greater risk compared to Saratoga's more conservative approach. Prospect's larger size provides diversification but may reduce underwriting discipline.