Business Context and Reporting Period
This Form 8-K, dated July 30, 2010, reports a material restructuring and change in control for Saratoga Investment Corp. (formerly GSC Investment Corp.). The filing details a private placement of equity, the termination of prior management and debt facilities, and the appointment of new leadership and investment advisors.
Key Financial Metrics and Agreements
- Equity Financing: Completed a private placement of $15 million in common stock at $1.52 per share.
- Debt Financing: Established a new $40 million credit facility (Replacement Facility) with Madison Capital Funding LLC and U.S. Bank National Association.
- Debt Repayment: Used proceeds from the equity offering and approximately $18.4 million from the new facility to fully repay the prior "Deutsche Bank Facility."
- Management Fees:
- Base Management Fee: 1.75% per annum of gross assets (excluding cash).
- Incentive Fee: 20% of pre-incentive fee net investment income (subject to a hurdle) and 20% of capital gains realized after May 31, 2010.
- Administration Fee: Capped at $1 million for the first year.
- Ownership Change: Investors (Saratoga, CLO Partners, and affiliates) acquired 9,868,422 shares, representing 36.8% of outstanding common stock.
Material Changes Versus Prior Period
- Corporate Identity: Changed name from "GSC Investment Corp." to "Saratoga Investment Corp." and ticker symbol from "GNV" to "SAR."
- Management Transition: Former CEO Seth M. Katzenstein, CFO Eric A. Snyder, and other officers/directors affiliated with the prior advisor (GSC (NJ), L.P.) resigned. Christian L. Oberbeck was appointed CEO/President and Richard A. Petrocelli was appointed CFO/Secretary.
- Advisory Relationship: Terminated agreements with GSC (NJ), L.P. and entered into new Investment Advisory and Management and Administration agreements with Saratoga Investment Advisors, LLC.
- Capital Structure: Replaced the 2007 Deutsche Bank credit agreement with a new facility secured by substantially all assets of the GSC Subsidiary.
Guidance, Outlook, and Risks
The filing does not provide specific financial guidance or revenue projections. However, management commentary indicates a strategic reset with a new investment adviser responsible for sourcing and executing investments. Key risks and contingencies include:
- Debt Covenants: The new credit facility is secured by assets and includes interest rates based on LIBOR plus a margin (5.50%) or an alternative base rate plus 4.50%, plus a 0.75% commitment fee on unused amounts.
- Fee Structure: The incentive fee calculation for capital gains resets as of May 31, 2010, meaning prior unrealized losses are excluded from the calculation, potentially increasing future fees to the adviser.
- Registration Rights: The company agreed to file a registration statement for the resale of shares sold in the private placement within 30 days of closing.
Important Facts for Investor Verification
- Verify the exact terms of the $40 million Replacement Facility, specifically the advance rates (50%-75%) and collateral requirements.
- Confirm the impact of the capital gains fee reset date (May 31, 2010) on future net income distribution to shareholders.
- Review the full text of the Investment Advisory and Management Agreement (Exhibit 10.1) for details on the "hurdle" rate for the incentive fee.
- Monitor the effectiveness of the registration statement for the 9.87 million shares sold in the private placement.
- Assess the financial health of the new investment adviser, Saratoga Investment Advisors, LLC, and its track record.