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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2026-05-05 compared with 2025-05-07 · 57 added, 48 removed, 38 unchanged (73% of the section changed)

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

SUTHERLAND TO UPDATE

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Our business activities contain elements of market

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Accordingly, we have systems and procedures designed to identify and analyze our risks, to establish appropriate policies and thresholds

and to continually monitor this risk and thresholds by means of administrative and information technology systems and other policies and

and to continually monitor this risk and thresholds by means of administrative and information technology systems and other policies

and processes.

Interest rate risk is defined as the sensitivity

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Changes in the general level of interest rates can affect our net interest income, which is the difference between

the interest income earned on interest earning assets and our interest expense incurred in connection with our interest-bearing debt and

Changes in interest rates can also affect, among other things, our ability to acquire leveraged loans, high yield bonds and

other debt investments and the value of our investment portfolio.

the interest income earned on interest earning assets and our interest expense incurred in connection with our interest-bearing debt

and liabilities.

Changes in interest rates can also affect, among other things, our ability to acquire leveraged loans, high yield bonds

and other debt investments and the value of our investment portfolio.

Our investment income is affected by fluctuations

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comprised of floating rate investments that utilize SOFR or an alternate rate.

The Federal Reserve held interest rates steady in the first quarter

of 2025, following three consecutive rate reductions in the third and fourth quarter of 2024.

The Federal has indicated that there may be additional rate cuts in the future;

however, future

reductions to benchmark rates are not certain.

In a rising interest rate environment, our cost of funds would increase, which could reduce

our net investment income if there is not a corresponding increase in interest income generated by our investment portfolio.

It is possible

that the Federal Reserve’s tightening cycle could result in a recession in the United States, which would likely decrease interest

A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment

income if such decreases in base rates, such as SOFR, are not offset by corresponding increases in the spread over such base rates that

we earn on any portfolio investments, a decrease in in our operating expenses, including with respect to our income incentive fee, or

a decrease in the interest rate of our floating interest rate liabilities.

Our interest expense is affected by fluctuations in SOFR on

our Encina Credit Facility.

In addition, all of our assets have been transitioned from LIBOR to an acceptable replacement rate, such as

The Federal Reserve has reduced its benchmark interest

rate by 0.25% in each of September 2025, October 2025 and December 2025, bringing the benchmark rate to the 3.50% to 3.75% range.

The Federal Reserve maintained this range at both its January 2026

and March 2026 meetings.

In considering the extent and timing of any additional future adjustments, the Federal Reserve stated that it

will carefully assess income data relating to inflationary pressures and the unemployment rate, the evolving economic outlook, and the

balance of risks.

Given the evolving economic environment and policy considerations, there can be no assurance regarding the magnitude or timing of future federal funds rate adjustments

in either direction.

In an elevated interest rate environment, our cost of funds would increase, which could reduce our net investment

income if there is not a corresponding increase in interest income generated by our investment portfolio.

It is possible that the Federal

Reserve’s tightening cycle could result in a recession in the United States, which would likely decrease interest rates.

reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such

decreases in base rates, such as SOFR, are not offset by corresponding increases in the spread over such base rates that we earn on any

portfolio investments, a decrease in in our operating expenses, including with respect to our income incentive fee, or a decrease in

the interest rate of our floating interest rate liabilities.

Our interest expense is affected by fluctuations in SOFR on our Valley Credit

Facility and Live Oak Credit Facility.

In addition, all of our assets have been transitioned from LIBOR to an acceptable replacement

rate, such as SOFR.

At February 28, 2026, we had $739.4 million of

borrowings outstanding.

In addition, as of February 28, 2025, there were $32.5 million borrowings outstanding under the Encina Credit

Facility and $20.0 million borrowings outstanding under the Live Oak Credit Facility as of February 28, 2025.

As of February 28, 2025,

on a fair value basis, approximately 2.6% of our debt investments bea r interest at a fixed-rate

and approximately 97.4% of our debt investments bear interest at a floating rate.

As of February 28, 2025, 100% of our floating rate debt

investments are subject to interest rate floors.

Additionally, both the Encina Credit Facility and the Live Oak Credit Facility

are subject to a floating interest rate and is currently paid based on floating Term SOFR rate.

borrowings outstanding, which includes $32.5 million borrowings outstanding under the Valley Bank Credit Facility and $37.5 million under

the Live Oak Credit Facility.

As of February 28, 2026, on a fair value basis, approximately 98.8% of our debt investments bear interest

at a fixed-rate and approximately 1.2% of our debt investments bear interest at a floating rate.

As of February 28, 2026, 100% of our

floating rate debt investments are subject to interest rate floors.

Additionally, both the Valley Credit Facility and the Live Oak

Credit Facility are subject to a floating interest rate and is currently paid based on floating Term SOFR rate.

We have analyzed the potential impact of changes

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Changes in interest rates would have no impact

to our current interest and debt financing expense, as all our borrowings except for our credit facility are fixed rate, and our credit

facility is currently undrawn.

to our current interest and debt financing expenses, except for our borrowings under our Valley Credit Facility and Live Oak Credit Facility.

All of our remaining borrowings are fixed-rate borrowings.

Assuming that borrowings under our Valley Credit Facility and Live Oak Credit

Facility as of February 28, 2026 were to remain constant for a full fiscal year and no actions were taken to alter the existing interest

rate terms, a hypothetical change of a 1.0% increase in interest rates would cause a corresponding increase of approximately $0.7 million

to our interest expense.

Conversely, a hypothetical change of a 1.0% decrease in interest rates would cause a corresponding decrease

of approximately $0.7 million to our interest expense.

Although management believes that this measure

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tandem but, in times of unusual credit dislocations, have experienced periods of divergence.

Accordingly, no assurances can be given that

actual results would not materially differ from the potential outcome simulated by this estimate.

For further information, the following

table shows the approximate annualized increase or decrease in the components of net investment income due to hypothetical base rate changes

Accordingly, no assurances can be given

that actual results would not materially differ from the potential outcome simulated by this estimate.

For further information, the following table

shows the approximate annualized increase or decrease in the components of net investment income due to hypothetical base rate changes

in interest rates, assuming no changes in our investments and borrowings as of February 28, 2026.

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($ in thousands)

* Adjusts Net Interest Income for the impact of the first incentive

fee on Net Investment Income

* Adjusts Net Interest Income for the impact of the first

incentive fee on Net Investment Income

The table above assumes no defaults or prepayments

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The hypothetical results would also be impacted by the changes in the amount of debt

outstanding under our Encina Credit Facility, with an increase (decrease) in the debt outstanding under the Encina Credit Facility resulting

in an (increase) decrease in the hypothetical interest expense.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

outstanding under our Valley Credit Facility and Live Oak Credit Facility, with an increase (decrease) in the debt outstanding under

the Valley Credit Facility or Live Oak Credit Facility resulting in an (increase) decrease in the hypothetical interest expense.

CONSOLIDATED FINANCIAL STATEMENTS AND

SUPPLEMENTARY DATA

Our consolidated financial statements are annexed

to this Annual Report beginning on page F-1.

In addition, the Financial Statements of Saratoga Investment Corp.

CLO 2013-1, Ltd.

to this Annual Report beginning on page S-1.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING

AND FINANCIAL DISCLOSURE

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk