$11.30
$26.70
bear $11.30
base $17.90
bull $26.70
margin of safety $11.00
market price* $25.33
Saratoga Investment Corp. is a publicly traded, externally managed business development company. It lends mainly first-lien and second-lien loans to U.S. middle-market companies. It also holds a CLO (a pooled loan vehicle) and a joint venture. It borrows through SBA debentures, notes and credit facilities. Its earnings are the interest and fees from the loans, less its own interest cost, management fees and expenses. This is called net investment income. Credit losses do not flow through it. Losses hit the value of the portfolio instead, so we value the company on net investment income less the losses the record shows. Net investment income per share by fiscal year (ending in February): FY2021 $2.07, FY2022 $1.74, FY2023 $2.94, FY2024 $4.49, FY2025 $3.81, FY2026 $2.32. The FY2024 and FY2025 figures reflect peak interest rates. FY2025 also includes about $8.2 million (about $0.59 per share) of one-time back-interest from the Knowland loan. That interest is gone: FY2026 interest income fell 18%, and the average yield on the core loan book fell from 10.8% to 9.6% as base rates dropped and lending spreads tightened. The first quarter of FY2027 (ended May 2026) produced only $0.47 per share, or about $1.87 annualized. We did not anchor on the median of all six years ($2.63). That figure includes high-rate years that have since reversed. We used $2.00 per share as the ongoing earnings level, between the FY2026 result and the latest quarter's pace. This earnings stream fell 39% in FY2026 (from $3.81 to $2.32), and we assume no rebound. Year 1 starts at or below the recent pace. Credit losses are large in this record. Net income after gains and losses (the net increase in net assets from operations) was $8.9 million, $28.1 million and $36.6 million in FY2024 through FY2026. Net investment income was $56.9 million, $53.0 million and $36.8 million. The gap is about $73 million, or roughly $1.7 per share per year. Most of it came from a $42 million realized loss in FY2025 and a $47 million unrealized markdown in FY2024. FY2026 was nearly clean. Net asset value per share has fallen from $25.86 (Feb 2025) to $24.42 (Feb 2026) and $23.23 (May 2026). The dividend also looks stretched. The company declared $0.25 per month ($0.75 per quarter, $3.00 a year) against $0.47 of quarterly net investment income. Paying more than it earns means the share of the business behind each share shrinks. A cut looks likely, but we do not value it as a certainty. Method: each case pays out net investment income, and portfolio value per share erodes by the credit losses. A per-share loss rate of X% a year shrinks the payout at that rate. Value equals net investment income divided by (6% plus that erosion rate). Growth is not credited. The book is being funded roughly at its earnings, share issuance has run below net asset value recently, and rates and spreads are moving against it. The CLO management fee stream is also winding down. Base case, $17.9 per share: net investment income of $2.00 per share, and credit losses of about $1.20 per share a year (5.2% of net asset value). That is below the three-year average loss of about $1.70, because FY2024's markdowns partly reversed in FY2025 and FY2026 was nearly clean. Bear case, $11.3 per share: net investment income falls to $1.60 as yields compress further and the Saratoga CLO keeps winding down. One portfolio company and the CLO's F-2-R-3 note are already on non-accrual. Losses run at $1.90 a year, roughly the three-year median. Bull case, $26.7 per share: net investment income holds at $2.30, near the FY2026 level, and losses drop to $0.60 a year, closer to the clean FY2026. The result is above the $23.23 net asset value because a roughly 10% yield on net asset value, discounted at 6%, supports a premium if losses stay this low. Accounting judgement: cash flow from operations for a lender like this is dominated by loan purchases and repayments, so it is not a usable earnings measure. We used net investment income instead. That is a levered figure, already after interest expense, so no debt is subtracted separately. Leverage, including the $25 million of 7.25% notes issued April 2026, shows up in the bear case through the loss-erosion rate. What would make this wrong: a sharp fall in credit losses, well below $1.20 per share a year, with rates holding, would push value toward the bull case. A repeat of the FY2025 realized losses, or further non-accruals, would push it toward the bear case.