Business Context and Reporting Period
Company: GSC Investment Corp. (Note: Filing text identifies registrant as GSC Investment Corp., though metadata references Saratoga Investment Corp. due to a pending transaction).
Reporting Period: Quarter ended May 31, 2010.
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.
Going Concern Status: The Company remains in default on its Revolving Credit Facility since July 30, 2009. Independent auditors have expressed substantial doubt regarding the Company's ability to continue as a going concern. A $55 million recapitalization plan with Saratoga Investment Advisors, LLC was announced in April 2010 to cure the default, subject to shareholder approval.
Key Financial Metrics
| Metric | May 31, 2010 | Feb 28, 2010 |
|---|---|---|
| Total Assets | $96,479,570 | $96,935,316 |
| Total Liabilities | $38,346,680 | $41,457,164 |
| Net Assets | $58,132,890 | $55,478,152 |
| Net Asset Value (NAV) per Share | $3.43 | $3.27 |
| Investments at Fair Value | $89,928,399 | $89,373,150 |
| Revolving Credit Facility (Debt) | $33,807,431 | $36,992,222 |
| Cash and Cash Equivalents | $2,928,017 | $3,352,434 |
| Net Investment Income | $2,202 | $2,563,989 (Prior Year Q2) |
| Net Increase in Net Assets from Operations | $2,654,738 | $5,363,816 (Prior Year Q2) |
| Earnings Per Share (Basic & Diluted) | $0.16 | $0.65 (Prior Year Q2) |
Material Changes vs. Prior Comparable Period
- Investment Income Decline: Total investment income decreased 41.0% to $2.8 million from $4.8 million in the prior year quarter. This was driven by an increased allowance for impaired loans ($1.1 million vs. $0.3 million), a decrease in the effective interest rate on the GSCIC CLO investment, and a smaller average portfolio size.
- Expense Increase: Total operating expenses (net of waivers) increased 27.6% to $2.8 million. Interest and credit facility expenses rose to $831,121 due to the default rate increase (weighted average rate 9.25% vs. 3.85% prior year). Professional fees surged 236.3% to $1.1 million due to legal costs associated with the proposed Saratoga transaction.
- Realized Losses: The Company recorded a net realized loss of $2.6 million, primarily from the sale of Legacy Cabinets, Inc. debt instruments, compared to a negligible loss of $5,152 in the prior year.
- Unrealized Gains: Net unrealized appreciation on investments was $5.2 million, driven by a $1.5 million improvement in the valuation of the GSCIC CLO investment and recoveries in McMillin Companies and Elyria Foundry.
Guidance, Outlook, Risks, and Unusual Items
- Proposed Recapitalization: The Company is pursuing a transaction with Saratoga Investment Advisors, LLC involving a $15 million equity investment and a new $40 million credit facility to repay existing debt and cure the default. This includes a change of investment adviser and a one-for-ten reverse stock split.
- Default Risk: The Company is in a continuing event of default on its Revolving Facility. The lender has the right to accelerate repayment and liquidate collateral. While the lender has not accelerated debt to date, forced sales could result in values below carrying amounts.
- Liquidity Constraints: Due to the default and amortization period, the Company must fund operations and dividends solely from cash on hand, management fees, and proceeds from the GSCIC CLO investment. Principal and interest proceeds from pledged assets are used to repay the facility.
- Portfolio Quality: Non-performing or delinquent investments totaled $14.3 million. 38.9% of the portfolio (excluding CLO/equity) was rated "Red" (payment default risk) under the internal Credit and Monitoring Rating (CMR) system.
- Dividends: No dividends were declared for the quarter ended May 31, 2010.
Investor Verification Checklist
- Transaction Approval: Verify the status of the shareholder vote on the Saratoga recapitalization plan and the associated reverse stock split.
- Debt Acceleration: Monitor for any notice from the lender regarding the acceleration of the $33.8 million Revolving Facility debt.
- Valuation Methodology: Review the assumptions used in the discounted cash flow model for the GSCIC CLO investment, which represents 20.2% of the portfolio and saw a significant valuation improvement.
- Going Concern: Assess the likelihood of the Company obtaining alternative financing if the Saratoga transaction fails to close.
- Expense Waivers: Confirm the status of the $2.6 million in deferred incentive fees payable to the current adviser, which are subject to waiver upon closing of the Saratoga transaction.