Saratoga Investment Corp. 10-Q Summary
Business Context and Reporting Period
Company: Saratoga Investment Corp. (formerly GSC Investment Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2010
Business Model: A non-diversified closed-end management investment company regulated as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The company invests primarily in leveraged loans, mezzanine debt, and equity of middle-market companies.
Key Event: In July 2010, the company consummated a recapitalization transaction to resolve a default on its previous credit facility. This included a $15 million private placement with the new manager (Saratoga Investment Advisors, LLC), the termination of the old facility, and the establishment of a new $40 million revolving credit facility with Madison Capital Funding LLC.
Key Financial Metrics
| Metric | Nine Months Ended Nov 30, 2010 | Nine Months Ended Nov 30, 2009 |
|---|---|---|
| Total Investment Income | $11.02 million | $11.98 million |
| Net Investment Income | $4.42 million | $4.51 million |
| Net Realized Loss | $(16.28) million | $(1.58) million |
| Net Unrealized Appreciation | $24.55 million | $(4.56) million |
| Net Increase in Net Assets from Operations | $12.66 million | $(1.60) million |
| Earnings Per Share (Basic & Diluted) | $5.86 | $(1.87) |
| Net Assets (Total) | $81.78 million | $64.34 million |
| Net Asset Value (NAV) Per Share | $24.95 | $37.98 |
| Revolving Credit Facility Outstanding | $15.75 million | $36.99 million |
| Cash and Cash Equivalents | $4.57 million | $3.35 million |
Material Changes vs. Prior Period
- Operational Turnaround: The company shifted from a net decrease in net assets of $1.60 million in the prior year to a net increase of $12.66 million. This was driven primarily by a $24.55 million net unrealized appreciation on investments, largely due to improved valuations of the GSC Investment Corp. CLO 2007 LTD. investment and reversals of previously recorded losses on restructured assets.
- Realized Losses: Net realized losses increased significantly to $16.28 million (from $1.58 million) due to the restructuring of the Jason Incorporated unsecured notes (realized loss of $11.35 million) and Bankruptcy Management Solutions (realized loss of $2.39 million).
- Expense Waiver: The company recorded a $2.64 million waiver of deferred incentive management fees from the former investment adviser as part of the recapitalization, which significantly reduced total expenses.
- Debt Reduction: Outstanding debt under the revolving credit facility decreased from $37.0 million at the beginning of the fiscal year to $15.75 million at period end following the recapitalization.
- Portfolio Composition: The portfolio fair value increased to $91.2 million. The GSCIC CLO investment (structured finance) now represents 25.3% of the total portfolio, up from 18.7%.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes the improvement in results to the recapitalization, which stabilized the company's liquidity and removed the default status. The unrealized gains were driven by better-than-forecast default rates and improved reinvestment assumptions for the CLO investment.
- Dividends: A dividend of $4.40 per share was declared on November 12, 2010. Due to cash limits, the dividend was paid as a combination of cash ($1.2 million) and stock (596,235 shares).
- Liquidity: The company has a $40 million senior secured revolving credit facility with a borrowing base of $23.1 million as of November 30, 2010. The facility is subject to collateral tests including an Overcollateralization Ratio of at least 200%.
- Risks:
- Credit Risk: The portfolio contains non-performing or delinquent investments totaling $2.0 million. 29.5% of the portfolio is rated "Red" (payment default risk) under the company's Credit and Monitoring Rating (CMR) system.
- Concentration Risk: The GSCIC CLO investment is a significant portion of the portfolio (25.3%) and is subject to unique risks associated with collateralized loan obligations.
- Market Risk: Valuations of private investments are subjective and may fluctuate materially.
Investor Verification Checklist
- Valuation of GSCIC CLO: Verify the assumptions used for the $7.2 million unrealized gain on the GSCIC CLO investment, specifically the default rates (3%) and recovery rates (40-65%) used in the discounted cash flow model.
- Realized Losses: Review the specific terms of the Jason Incorporated and Bankruptcy Management Solutions restructurings that led to the $13.7 million in realized losses.
- Expense Waiver Sustainability: Confirm that the $2.64 million fee waiver was a one-time event and assess future expense ratios without this benefit.
- Collateral Tests: Monitor the company's compliance with the Overcollateralization Ratio (200%) and Interest Coverage Ratio (175%) under the new Madison Capital Funding facility.
- Dividend Policy: Note the heavy reliance on stock dividends (22% of outstanding shares issued) due to cash constraints, which may dilute existing shareholders.