Business Context and Reporting Period
Company: GSC Investment Corp. (Saratoga Investment Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2008
Business Overview: A non-diversified closed-end management investment company regulated as a Business Development Company (BDC). The Company invests primarily in debt and equity of private middle-market companies and select high-yield bonds. It is externally managed by GSCP (NJ), L.P.
Key Financial Metrics
| Metric | Three Months Ended May 31, 2008 | Three Months Ended May 31, 2007 |
|---|---|---|
| Total Investment Income | $5,715,361 | $4,102,061 |
| Net Investment Income | $3,195,473 | $1,957,899 |
| Net Realized Gain/(Loss) | $(287,410) | $1,021,068 |
| Net Unrealized Appreciation/(Depreciation) | $(96,815) | $700,781 |
| Net Increase in Net Assets from Operations | $2,811,248 | $3,679,748 |
| Earnings Per Share (Basic & Diluted) | $0.34 | $0.59 |
| Net Asset Value (NAV) Per Share | $11.75 | $14.21 |
| Total Assets | $174,276,866 | $192,841,668 |
| Total Liabilities | $76,830,218 | $94,972,628 |
| Revolving Credit Facility Outstanding | $60,650,000 | $78,450,000 |
| Cash and Cash Equivalents | $1,963,407 | $1,072,641 |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments at fair value decreased from $172.8 million to $156.4 million. This decline was driven by a net realized loss of $0.3 million and net unrealized depreciation of $0.1 million, partially offset by new investments.
- Debt Reduction: Borrowings under the Revolving Credit Facility decreased by approximately $17.8 million (from $78.5 million to $60.7 million). This paydown was funded primarily by the repayment of a $23 million investment in SILLC Holdings, LLC.
- Expense Structure: Total operating expenses increased by 16.9% to $2.8 million, primarily due to a larger weighted average portfolio size. However, the Company recorded $0.3 million in expense waivers and reimbursements.
- Dividends: Dividends declared increased to $0.39 per share ($3.2 million total) compared to $0.24 per share ($2.0 million total) in the prior year period.
Outlook, Risks, and Management Commentary
- Investment Activity: The Company made 11 new investments totaling $19.3 million in principal. Significant exits included the full repayment of the SILLC Holdings loan at par.
- Fee Deferral: The payment of the incentive fee for the quarter ended May 31, 2008, was deferred because the sum of distributions and change in net assets did not meet the 7.5% hurdle rate requirement. Additionally, $0.6 million of previously paid incentive fees were returned by the advisor.
- Expense Reimbursement Termination: The Expense Reimbursement Agreement with the Manager terminated on March 23, 2008. Management notes this will negatively impact net investment income in the current fiscal year compared to the prior year.
- Market Risks: The Company faces interest rate risk, with $60.7 million in floating-rate borrowings. It holds interest rate caps with a notional amount of $86.6 million to mitigate exposure to LIBOR increases above 8%.
- Valuation Uncertainty: Approximately 67% of the portfolio ($104.1 million) is fair-valued by the Board of Directors rather than using readily available market quotes, introducing subjectivity to the NAV.
Key Facts for Investor Verification
- Asset Coverage Ratio: Verify the current asset coverage ratio (261% as of May 31, 2008) to ensure compliance with the 1940 Act requirement of at least 200%.
- Credit Quality: Review the internal Credit and Monitoring Rating (CMR) distribution; 51.8% of the portfolio held a score of 2.00-2.99 (moderate leverage/performance), while 28.2% held a score of 3.00-3.99 (junior capital structure/below expectations).
- Concentration Risk: Confirm the impact of the GSC Investment Corp. CLO 2007, Ltd. investment, which represents 18.6% of the total portfolio and is a first-loss position.
- Liquidity Position: Assess the $39.3 million of undrawn commitments remaining on the Revolving Facility against the Company's plan to reinvest proceeds from the SILLC repayment in the second quarter.
- Dividend Sustainability: Monitor the ratio of net investment income to distributions, noting the termination of the expense reimbursement agreement which may pressure future income.