Co-produced with Treading Softly and PendragonY for High Dividend Opportunities
We have recently launched a series of reports on how income investors can increase their income by investing in collateralised loans (or CLO & # 39 ;is) ). In the first report of this series, we explained which CLO's are and how they work. If you didn't get the chance to read the report, this link is:
"Increasing Your Income With CLOs"
In our second report from the same series, we highlighted our preferred CLO investment, which is Oxford Lane Capital (OXLC). This report was also recently published on Seeking Alpha and entitled to: 1
Today's article is the third of this series where we highlight Saratoga Investment (SAR), a BDC that manages CLO's.
SAR is a very unique one because this is a yield growth BDC. Note that the vast majority of BDCs do not grow their profits. We are extremely bullish on SAR, which recently hiked its yield again to $ 0.54 per share. Stock for a forward yield of 8.9% .
SAR manages CLO's and is therefore less risky than OXLC or Eagle Point Credit Company (ECC) that invests the most in CLO's. Both myself and co-author Treading Soft are long OXLC, ECC and SAR in this sector.
Short Business Overview
SAR is a BDC and CLO manager who quickly grows his assets under management under management. SAR will continue to see positive market price action due to its recent offering and adding additional funding at a low cost. SAR is a high yield share that currently accounts for 8.9%. As a BDC, the proceeds are subject to 1099 taxation, so investors do not receive K-1 tax forms, which is a great advantage.
SAR operates as a BDC and makes investments in mid-market businesses – either through loans or direct investment – to seek out its income. SAR has also started and managed a CLO. These two main roads provide SAR income.
Source: SAR Earning Slides
SAR has actively increased its focus on BDC lending, as opposed to being heavily dependent on one CLO. Last year, SAR increased its CLO to $ 500 million. This is a $ 200 million increase or almost double the CLO size. SAR oversees the CLO and receives administration fees to ensure that the loans within CLO are within their credit ratings and perform their work properly. This increase was completely timed as the market for leading loans experienced massive price declines. As a CLO manager, it monitors to provide these loans to CLO – making every dollar invested to reverse and achieve higher returns for its tranche holders.
Source: SAR Earning Slides
SAR's portfolio consists primarily of first and second loan loans. These provide stability to SAR's portfolio, and the total return support continued to issue shares at 9% to see a return of 10%.
To help finance growth, SAR recently offered an additional $ 40 million in banknotes in 2025. These notes provide 6.25%, far less than their portfolio returns and trade under the name and ticker Saratoga Investment Corp. 6.25% (SAF). This will help the fund continue its net investment income growth at a lower price than issuing additional shares.
Strong Historical Growth
SAR's management has monitored strong AUM and NAV growth for its investors – while maintaining net investment income. 19659021] SAR AUM "width =" 540 "height =" 245 "data-width =" 540 "data-height =" 245 "data and image-twitter_small_card =" true "data and image twitter_large_card =" true "data-and-image-twitter_image_post =" true "data-and-image-msn =" true "data-and-image-facebook =" false "data-and-image-google_news =" true "data-and-image -google_plus = "false" data-and-image-linkdin = "true" />
Source: SAR Earning Slides
SAR & # 39; s AUM has increased 455% since 2011 . Signs of concern for investors, which means that SAR has diluted its shares or rapidly putted on debt for growth, however, this massive increase in AUM – typically a 13% quarter-on-quarter surplus – corresponds to the steady improvement in SAR's credit strength over the Underlying Assets Only two loans in the last report were considered non-accruing, how is this rapid growth in AUM reflected for SAR shareholders? Rapidly Growing NAV.
Source: SAR Earning Slides [1 9659025] SARs NAV has seen strong growth. This NAV is a fundamental part of its strategy. A growing NAV raises the question of how profitable this growth in NAV has been. The answer is strong.
Source: SAR Earning Slides
SAR's net investment income, essentially what is left of revenue after cost, is deducted, has experienced strong growth. This growth is transformed into an increasing profit that we are discussing next time. This shows strongly that SAR's efforts to grow have not come at the expense of the shareholders, but to their direct advantage. SAR's growing size has enabled it to access lower cost capital than issuing shares as seen in the recent note offer. These notes cost less than the issue of shares in the same dollar, which in turn will boost the growth of SAR's NII. We strongly expect SAR & # 39; s NII to continue to grow as it grows and conservatively maintains a strong, credit-focused portfolio.
SAR is issued quarterly, and it has had a stable and strong growth. The yield was hiked for 17 straight quarters. This is very remarkable!
Source: SAR Earnings Slides
Even more remarkable is that yields have been steep and have increased by 194% since Q2 2015.
Currently, SAR is over – Earns its yield by 23%, which means there are more increases on the road. This also gives SAR extra powder to complete accretive offers. SAR's management forecasts that further dividends are rising.
SAR's high 8.9% return and continued growth guarantee a possible future investment as this company will easily reach 10% on current prices after continuing increases.
Data from YCharts
Another reason for an investment in SAR would be to the benefit of the immediate income seekers that it consistently has a high yield while one sees capital appreciation or preservation. SAR's quiet winning status has provided a continued opening for investment to capture this high yield.
SAR is a great point in its growth. The market yield is well below its portfolio dividend and the recent issue of banknotes gives it a cheap means of additional funds over the issue of shares on the market. SAR's management has a fantastic track record of growth in conservative funds. 99% of its investments are considered to have a strong credit rating of SAR's management.
The biggest risk to SAR is the floating nature of its loan portfolio; as the primary rate is expected to remain stable, or with a decrease later this year, SAR's income will also decrease. However, this concern is diminished by SAR's use of a 3-month LIBOR and a fixed rate – generally between 6% and 8%, and sometimes as high as 9.75%. This means that even small interest rates do not affect SAR's ability to grow as strongly as others.
SAR's exposure to CLOs is limited in comparison to equals like Oxford Square Capital (OXSQ) or Prospect Capital (PSEC). That is the advantage of the investors. Typically, a BDC that is over-invested in CLO debt or equity holdings is exposed to greater risks than a fund such as Eagle Point or Oxford Lane, designed to mitigate CLO risks. BDC is limited to the amount of CLO exposure they may have. The SAR manages its CLO and holds only a limited amount of the stock transaction, which was required at the time it issued it.
An investment in SAR has several advantages:
- A growing high yield
- Strong credit strength of mandatory
- Rapidly growing AUM that overcomes its yield
This company has a bright future , conservative leadership and an increasing yield in the mix. Investors should consider adding this to their mix of BDC investments. We consider SAR a purchase below $ 25.00, as the growing dividend and conservative nature will bring yields higher over time.
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Disclosure: I am / we are long SAR, ECC, OXLC. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (except from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.