Saratoga Investment (SAR) risk factors, FY2025 10-K

RISKS RELATED TO OUR BUSINESS AND STRUCTURE

1. 01We employ leverage, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us
2. 02Corresponding Return to Common Stockholder (1) -46% -30% -14% 2% 18%
3. 03We are exposed to risks associated with changes in interest rates including potential effects on our cost of capital and net investment income
4. 04Uncertainty about U.S. Presidential Administration initiatives could negatively impact our business, financial condition and results of operations
5. 05There are significant potential conflicts of interest which could adversely impact our investment returns
6. 06Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business
7. 07Legislative or other actions relating to taxes could have a negative effect on the Company
8. 08There is uncertainty surrounding potential legal, regulatory and policy changes by the current presidential administration and Congress in the United States that may directly affect financial institutions and the global economy
9. 09Changes to United States tariff and import/export regulations may have a negative effect on the operations of our portfolio companies and, in turn, harm us
10. 10We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends
11. 11Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited
12. 12Internal and external cyber threats, as well as other disasters, could impair our ability to conduct business effectively
13. 13Regulations governing our operation as a BDC will affect our ability to raise additional capital
14. 14Effective April 16, 2019, our asset coverage requirement was reduced from 200% to 150%, which may increase the risk of investing in the Company
15. 15The agreements governing our Encina Credit Facility and our Live Oak Credit Facility contain various covenants that, among other things, limit our discretion in operating our business and provide for certain minimum financial covenants
16. 16We will be subject to U.S. federal income tax imposed at corporate rates if we fail to qualify as a RIC
17. 17Because we intend to distribute between 90% and 100% of our income to our stockholders in connection with our election to be treated as a RIC, we will continue to need additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired
18. 18We may have difficulty paying our required distributions if we recognize income before or without receiving cash in respect of such income
19. 19We operate in a highly competitive market for investment opportunities
20. 20While we do not seek to compete primarily based on the interest rates we offer, we believe that some our competitors may make loans with interest rates that are comparable or lower than the rates we offer
21. 21We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer
22. 22Our ability to achieve our investment objective depends on our ability to acquire suitable investments and monitor and administer those investments, which depends, in turn, on Saratoga Investment Advisors’ ability to identify, invest in and monitor companies that meet our investment criteria
23. 23We may experience fluctuations in our quarterly and annual results
24. 24Terrorist attacks, acts of war, or natural disasters may affect any market for our common stock, impact the businesses in which we invest and harm our business, operating results and financial condition
25. 25Substantially all of our portfolio investments are recorded at fair value as determined in good faith by our board of directors; such valuations are inherently uncertain and may be materially higher or lower than the values that we ultimately realize upon the disposal of such investments
26. 26Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse
27. 27Our wholly owned subsidiaries, SBIC II LP and SBIC III LP, received an SBIC license from the SBA on August 14, 2019 and September 29, 2022, respectively

RISKS RELATED TO THE CURRENT ENVIRONMENT

1. 28Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability
2. 29We are currently operating in a period of significant market disruption and economic uncertainty, which may have a negative impact on our business, financial condition and results of operations. An extended disruption in the capital markets and the credit markets could negatively affect our business
3. 30Inflation may adversely affect the business, results of operations and financial condition of our portfolio companies, which may, in turn, impact the valuation of such portfolio companies
4. 31Further downgrades of the U.S. credit rating, automatic spending cuts, or another government shutdown could negatively impact our liquidity, financial condition and earnings
5. 32Economic recessions or downturns could impair the ability of our portfolio companies to repay loans and harm our operating results

RISKS RELATED TO OUR ADVISER AND ITS AFFILIATES

1. 33We may be obligated to pay Saratoga Investment Advisors incentive fees even if we incur a net loss, or there is a decline in the value of our portfolio
2. 34Under the terms of the Management Agreement, we may have to pay incentive fees to Saratoga Investment Advisors in connection with the sale of an investment that is sold at a price higher than the fair value of such investment on May 31, 2010, even if we incur a loss on the sale of such investment
3. 35The way in which the base management and incentive fees under the Management Agreement is determined may encourage Saratoga Investment Advisors to take actions that may not be in our best interests
4. 36The base management fee we pay to Saratoga Investment Advisors may induce it to influence our leverage, which may be contrary to our interest
5. 37Saratoga Investment Advisors’ liability is limited under the Management Agreement and we will indemnify Saratoga Investment Advisors against certain liabilities, which may lead it to act in a riskier manner on our behalf than it would when acting for its own account
6. 38Our ability to enter into transactions with our affiliates is restricted

RISKS RELATED TO OUR INVESTMENTS

1. 39If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event our portfolio companies default on their indebtedness
2. 40Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us
3. 41A majority of our debt investments are not required to make principal payments until the maturity of such debt securities and are generally riskier than other types of loans
4. 42We may be exposed to higher risks with respect to our investments that include PIK interest, particularly our investments in interest-only loans
5. 43The lack of liquidity in our investments may adversely affect our business
6. 44We may not have the funds to make additional investments in our portfolio companies which could impair the value of our portfolio
7. 45The debt securities in which we invest are subject to credit risk and prepayment risk
8. 46Our investments in Saratoga CLO have a different risk profile than would direct investments made by us, including less information available and fewer rights regarding repayment compared to companies we invest in directly as well as complicated accounting and tax implications
9. 47The senior loan portfolio of Saratoga CLO may be concentrated in a limited number of industries or borrowers, which may subject Saratoga CLO, and in turn us, to a risk of significant loss if there is a downturn in a particular industry in which Saratoga CLO is concentrated
10. 48Failure by Saratoga CLO to satisfy certain debt compliance ratios may entitle senior debtholders to additional payments, which may harm our operating results by reducing payments we would otherwise be entitled to receive from Saratoga CLO
11. 49Downgrades by rating agencies of broadly syndicated loans could adversely impact the financial performance of Saratoga CLO and its ability to pay equity distributions in the future
12. 50We may invest through joint ventures, partnerships or other special purpose vehicles and our investments through these vehicles may entail greater risks, or risks that we otherwise would not incur, if we otherwise made such investments directly
13. 51Available information about privately held companies is limited
14. 52When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment
15. 53Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies
16. 54There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims
17. 55Our investments in equity securities involve a substantial degree of risk
18. 56Our investments in foreign debt, including that of emerging market issuers, may involve significant risks in addition to the risks inherent in U.S. investments
19. 57We may expose ourselves to risks if we engage in hedging transactions
20. 58The success of our hedging transactions will depend on our ability to correctly predict movements in currencies and interest rates
21. 59Our investments may be risky, and you could lose all or part of your investment
22. 60Our portfolio may continue to be concentrated in a limited number of industries. A downturn in any particular industry in which we are invested could significantly impact the aggregate returns we realize
23. 61A number of our portfolio companies are in the Software-as-a-Service industry and such companies are subject to additional risks that are unique to that industry, and the financial results of our portfolio companies in the Software-as-a-Service industry could materially adversely affect our financial results
24. 62If our primary investments are deemed not to be qualifying assets, we could be precluded from investing in our desired manner or deemed to be in violation of the 1940 Act

RISKS RELATED TO OUR COMMON STOCK

1. 63Investing in our common stock may involve an above average degree of risk
2. 64We may choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive
3. 65Due to the current market conditions, we may defer our dividends and choose to incur U.S. federal excise tax in order to preserve cash and maintain flexibility
4. 66The market price of our common stock may fluctuate significantly
5. 67Our business and operation could be negatively affected if we become subject to any securities litigation or shareholder activism, which could cause us to incur significant expense, hinder execution of investment strategy and impact our stock price
6. 68There is a risk that you may not receive distributions or that our distributions may not grow over time
7. 69Our governing documents and the Maryland General Corporation Law contain provisions that may have the effect of delaying, deferring or preventing a future transaction or change in control of us that might involve a premium price for our stockholders or otherwise be in their best interest
8. 70Our common stock may trade at a discount to our NAV per share
9. 71Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current NAV per share of our common stock
10. 72The issuance of subscription rights, warrants or convertible debt that are exchangeable for our common stock, will cause your economic interest and voting power in us to be diluted as a result of our offering of any such securities

RISKS RELATED TO OUR NOTES

1. 73The Notes are unsecured and therefore are effectively subordinated to any existing and future secured indebtedness, including indebtedness under our Encina Credit Facility and our Live Oak Credit Facility
2. 74The Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries
3. 75The indenture under which the Notes are issued offers limited protection to holders of the Notes
4. 76We may not be able to repurchase the 4.375% 2026 Notes and the 4.35% 2027 Notes upon a Change of Control Repurchase Event
5. 77An active trading market for the Public Notes may not develop or be sustained, which could limit the market price of the Public Notes or the ability to sell them
6. 78Terms relating to redemption may materially adversely affect the return on our Notes
7. 79If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes