Saratoga Investment (SAR) risk factors, FY2026 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 us26% rewritten
2. 02Corresponding Return to Common Stockholder (1) -42% -27% -12% 3% 18%36% rewritten
3. 03General interest rate fluctuations and changes in credit spreads on floating rate loans may have a substantial negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on our rate of return on invested capitalNew
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 business46% rewritten
7. 07Legislative or other actions relating to taxes could have a negative effect on the Company
8. 08Changes to United States tariff and import/export regulations may have a negative effect on the operations of our portfolio companies and, in turn, harm us70% rewritten
9. 09We 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
10. 10Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited
11. 11Internal and external cyber threats, as well as other disasters, could impair our ability to conduct business effectively
12. 12Regulations governing our operation as a BDC will affect our ability to raise additional capital
13. 13Effective April 16, 2019, our asset coverage requirement was reduced from 200% to 150%, which may increase the risk of investing in the Company
14. 14The agreements governing our Live Oak Credit Facility and our Valley Credit Facility contain various covenants that, among other things, limit our discretion in operating our business and provide for certain minimum financial covenants35% rewritten
15. 15We will be subject to U.S. federal income tax imposed at corporate rates if we fail to qualify as a RIC
16. 16Because 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
17. 17We may have difficulty paying our required distributions if we recognize income before or without receiving cash in respect of such income
18. 18We operate in a highly competitive market for investment opportunities
19. 19While 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
20. 20We 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
21. 21Our 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
22. 22We may experience fluctuations in our quarterly and annual results
23. 23Terrorist 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
24. 24Substantially 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
25. 25Our 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
26. 26Our 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. 27Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability40% rewritten
2. 28We are currently operating in a period of capital markets 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 business22% rewritten
3. 29Inflation 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. 30Downgrades of the U.S. credit rating, automatic spending cuts, or another government shutdown could negatively impact our liquidity, financial condition and earnings62% rewritten
5. 31U.S. policy changes may adversely affect our businessNew
6. 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 restricted95% rewritten
7. 39We depend on the key personnel of Saratoga Investment Advisors for our future success, and if Saratoga Investment Advisors is unable to retain qualified personnel or if we lose any member of our senior management team, our ability to achieve our investment objective could be significantly harmedNew

RISKS RELATED TO OUR INVESTMENTS

1. 40If 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. 41Second 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. 42A 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. 43We may be exposed to higher risks with respect to our investments that include PIK interest, particularly our investments in interest-only loans34% rewritten
5. 44The lack of liquidity in our investments may adversely affect our business
6. 45We may not have the funds to make additional investments in our portfolio companies which could impair the value of our portfolio
7. 46The debt securities in which we invest are subject to credit risk and prepayment risk
8. 47Our 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. 48The 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. 49Failure 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. 50Downgrades 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 future28% rewritten
12. 51We 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. 52Available information about privately held companies is limited
14. 53When 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. 54Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies
16. 55There 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. 56Our investments in equity securities involve a substantial degree of risk
18. 57Our 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. 58We may expose ourselves to risks if we engage in hedging transactions
20. 59The success of our hedging transactions will depend on our ability to correctly predict movements in currencies and interest rates
21. 60Our investments may be risky, and you could lose all or part of your investment
22. 61Our 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 realize42% rewritten
23. 62We may be subject to risks associated with artificial intelligenceNew
24. 63A 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 results41% rewritten
25. 64If 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
26. 65We are subject to risks to the extent we invest in covenant-lite loansNew

RISKS RELATED TO OUR COMMON STOCK

1. 66Investing in our common stock may involve an above average degree of risk
2. 67We 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. 68Due 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. 69The market price of our common stock may fluctuate significantly
5. 70Our 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. 71There is a risk that you may not receive distributions or that our distributions may not grow over time
7. 72Our 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. 73Our common stock may trade at a discount to our NAV per share
9. 74Stockholders 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. 75The 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. 76The Notes are unsecured and therefore are effectively subordinated to any existing and future secured indebtedness52% rewritten
2. 77The Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries, including indebtedness under our Valley Credit Facility and our Live Oak Credit Facility35% rewritten
3. 78The indenture under which the Notes are issued offers limited protection to holders of the Notes
4. 79We may not be able to repurchase the 4.35% 2027 Notes upon a Change of Control Repurchase Event31% rewritten
5. 80An 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. 81Terms relating to redemption may materially adversely affect the return on our Notes40% rewritten
7. 82The 4.35% 2027 Notes mature on February 28, 2027 and are redeemable, in whole or in part, at any time at our option prior to November 28, 2026, at par plus a “make-whole” premium, and thereafter at parNew
8. 83If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes