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Saratoga Investment – Pick Your Poison

Business development company (BDC) Saratoga Investment Company (SAR) has recently sold 2 new baby bond issues.

The issue sold in April came with a 6% coupon (SAT) and trades at $23.15 today for a current yield of 6.47% The issue sold in October came with a juicy 8% coupon (SAJ) and today trades at a price of about $25–of course a current yield of 8%.. SAR also just sold a 8.125% issue which are not yet trading.

So which is the better buy of the 2 issues? It is not a simple question and more needs to be known on an investors intentions. Are you going to sell prior to maturity (both in 2027)? Do you anticipate that rates will be lower in 2024 than they currently are and SAR will be able to ‘refi’ the 8% notes? Both issues have 1st call dates in 2024.

So yield to maturity (full maturity) on both issues is around 8% right now. Yield to first call date in 2024 is about 8% on the 8% issue and almost 12% on the 6% issue. So it would appear that it is near a toss up unless you think rates are going to plunge back toward zero in which case the 6% issue would be superior.

7 thoughts on “Saratoga Investment – Pick Your Poison”

  1. Just for fun, I just did an exercise on what would happen to these two if interest rates went up 6 months from now….. If you assume that both SAT and SAJ are worth 9% YTM at that time, then SAJ would lose 78¢ in value but SAT would only lose 50¢. Although I didn’t do the math in the other direction, if interest rates go down in 6 months to 7 %, then SAT would have the full run of dollar price movement on a YTM basis, but SAJ’s price movement would be limited by YTC with its short call date and price at a premium… So theoretically SAT has more price protection in either direction, assuming they should both be worth identical YTMs in a rising interest rate environment…. I did not check my math and who knows if the YTMs should widen in a higher interest rate environment but actually now, YTM on SAT is already 8.11% I believe giving it slight advantage on a YTM basis.. I welcome anyone willing to check my math…..

  2. IF a significant recession occurs in the near future, and IF SAR becomes subject to bankruptcy, and IF suborbinated notes don’t provide much protection of getting your principal back as Grid has suggested, why not go up in the cap stack and grab a bond from a BDC like Hercules Capital:
    CUSIP: 427096AH5
    2.625 coupon
    maturity: 09/16/2026
    last price: $85.274
    last yield: 7.181

    Full disclosure: I own it

    1. Grabbing either SAT or SAJ is buying a BDC bond… no different than Hercules bond although not rated or as high quality….

  3. I bought a “normal” sized position (for me about 500 shares) of SAJ the other day at $24.94. Going to just let it percolate. Retirement planned from NASA at EOY 2023.

      1. HA! Yeah, NASA is my 2nd career but I’ve been with them almost 23 years now (3 as contractor and almost 20 as a civil servant). 20 is the magic number that entitles me to 10% more pension so I am hanging thru next year. I will admit my job is ever-so-cool and I get to do a lot of things with neat technologies and science. But, it’s time to sit back, prop up the feet and enjoy my grand-twins and pursue my numerous hobbies that include historical research (local) and running (50K trail run coming up in February). Never, ever thought I’d work for the gov’t having spent time in the telecommunications industry with entrepreneurial firms and even some start-ups. But NASA was an exception 23 years ago when I made the decision to go that direction and it has turned out very well! Thanks!

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