Business Context and Reporting Period
Company: GSC Investment Corp. (Saratoga Investment Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 31, 2009
Business Overview: 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 private middle-market companies and select high-yield bonds to generate current income and capital appreciation.
Key Financial Metrics
| Metric | Six Months Ended Aug 31, 2009 | Six Months Ended Aug 31, 2008 |
|---|---|---|
| Total Investment Income | $8.45 million | $11.55 million |
| Net Investment Income | $3.64 million | $6.65 million |
| Net Realized Loss | ($1.03 million) | ($0.13 million) |
| Net Unrealized Depreciation | ($13.39 million) | ($6.28 million) |
| Net Decrease in Net Assets from Operations | ($10.72 million) | $0.24 million (Increase) |
| Net Asset Value (NAV) per Share | $6.91 | $11.05 |
| Total Assets | $110.97 million | $130.66 million |
| Total Liabilities | $53.68 million | $62.65 million |
| Revolving Credit Facility Outstanding | $49.58 million | $58.99 million |
| Cash and Cash Equivalents | $6.64 million | $6.36 million |
Material Changes vs. Prior Period
- Significant Decline in NAV: Net Asset Value per share decreased from $8.20 at the beginning of the period to $6.91 at August 31, 2009, representing a 15.73% decline in total return based on NAV for the six-month period.
- Investment Portfolio Valuation: Total investments at fair value dropped from $118.91 million (Feb 28, 2009) to $100.04 million (Aug 31, 2009). This was driven primarily by a $13.39 million net unrealized depreciation on investments.
- Major Portfolio Impairments: Significant unrealized losses were recorded for specific holdings, including GSCIC CLO ($8.32 million), Jason Incorporated ($4.77 million), and Energy Alloys, LLC ($2.19 million).
- Expense Increases: Interest and credit facility expenses rose to $2.05 million for the six months ended August 31, 2009, compared to $1.46 million in the prior year. This increase is attributed to higher interest rates triggered by a credit facility default and a one-time write-off of $0.5 million in deferred financing costs.
- Dividend Suspension: The Board of Directors determined not to pay a dividend for the first quarter of fiscal year 2010, a departure from the prior year where dividends of $0.78 per share were declared.
Outlook, Risks, and Management Commentary
- Event of Default: On July 30, 2009, the company exceeded permissible borrowing limits for 30 consecutive days, resulting in a continuing event of default under its Revolving Credit Facility. The lender has the right to accelerate repayment and liquidate collateral. While the lender has not yet accelerated the debt, the company faces the risk of forced asset sales at values potentially below carrying amounts.
- Increased Borrowing Costs: Due to the default, the interest rate on the Revolving Facility increased to the greater of the commercial paper rate or the lender's prime rate plus 4.00% plus a 2.00% default rate (or LIBOR plus 6.00% plus 3.00% if commercial paper is unavailable). The weighted average interest rate for the quarter was 6.07%.
- Borrowing Base Decline: The Borrowing Base (the maximum amount permitted to be borrowed) declined from $59.9 million to $35.1 million due to the decline in the value of pledged collateral and downgrades of certain assets.
- Investment Activity: The company made no new investments during the six-month period due to unfavorable credit market conditions and constraints imposed by the credit facility. Net repayments of $5.5 million occurred.
- Strategic Alternatives: The company retained Stifel, Nicolaus & Company to evaluate strategic transaction opportunities and financing alternatives, though no assurance of a transaction is provided.
Key Facts for Investor Verification
- Default Status: Verify the current status of the July 30, 2009 event of default and whether the lender has elected to accelerate the debt or foreclose on collateral.
- Liquidity Position: Assess the sufficiency of cash reserves ($6.64 million) relative to the outstanding debt ($49.58 million) and the reduced Borrowing Base ($35.1 million).
- Portfolio Valuation: Review the specific valuation methodologies used for Level 3 assets, particularly the GSCIC CLO investment, which suffered an $8.32 million unrealized loss due to changes in default and recovery rate assumptions.
- Dividend Policy: Confirm the Board's decision regarding future dividend payments, given the suspension of the Q1 2010 dividend and the requirement to distribute 90% of taxable income to maintain RIC status.
- Expense Waivers: Monitor the expiration or modification of expense waiver agreements with the investment adviser, as these significantly impact net investment income.