Business Context and Reporting Period
Company: GSC Investment Corp. (Saratoga Investment Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2007
Business Overview: A non-diversified closed-end management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. The Company invests primarily in private middle-market companies and select high-yield bonds to generate current income and capital appreciation. It commenced operations in March 2007 and completed its IPO on March 28, 2007.
Key Financial Metrics
| Metric | Three Months Ended Nov 30, 2007 | Nine Months Ended Nov 30, 2007 |
|---|---|---|
| Total Investment Income | $5,881,998 | $15,865,683 |
| Net Investment Income | $3,070,255 | $8,184,944 |
| Net Realized Gain on Investments | $1,674,981 | $3,120,236 |
| Net Unrealized Depreciation | ($3,683,788) | ($7,346,094) |
| Net Increase in Net Assets from Operations | $1,061,448 | $3,959,086 |
| Earnings Per Share (Basic & Diluted) | $0.13 | $0.48 |
| Net Asset Value (NAV) Per Share | $13.51 | $13.51 |
| Total Assets | $203,933,939 | $203,933,939 |
| Total Debt Outstanding | $84,375,261 | $84,375,261 |
| Cash and Cash Equivalents | $3,336,248 | $3,336,248 |
| Asset Coverage Ratio | 233% | 233% |
Material Changes and Portfolio Activity
- Portfolio Composition: As of November 30, 2007, the portfolio consisted of 43 investments in 36 portfolio companies. The weighted average current yield was 11.4% for structured finance securities, 13.3% for unsecured notes, 11.8% for senior secured notes, 12.2% for second lien term loans, and 9.5% for first lien term loans.
- Investment Activity: During the nine months ended November 30, 2007, the Company made 131 investments totaling $301.5 million in principal. Exits and repayments totaled $101.8 million, resulting in net investments of $199.7 million.
- Unrealized Losses: Significant unrealized depreciation occurred in the period, primarily driven by EuroFresh Inc. ($2.2 million), McMillin Companies LLC ($1.8 million), and SILLC Holdings, LLC ($0.7 million).
- Delinquency: As of the filing date, IDI Acquisition Corp. was delinquent on a scheduled coupon payment of approximately $3.8 million principal amount, which would constitute an event of default if not cured by January 16, 2008.
Guidance, Outlook, and Risks
- Dividends: The Company declared a quarterly dividend of $0.38 per share on November 15, 2007. Subsequently, on December 28, 2007, a special dividend of $0.18 per share was declared to distribute realized capital gains.
- Financing Consolidation: In December 2007, the Company consolidated its Revolving and Term Facilities, repaying the Term Facility to increase overall borrowing capacity without increasing aggregate indebtedness.
- Off-Balance Sheet Arrangements: The Company entered into a warehouse agreement for a Collateralized Loan Obligations (CLO) Fund. As of November 30, 2007, $3.1 million of collateral was pledged against $21.6 million of settled assets. The CLO Fund is expected to close in late January 2008.
- Risk Factors:
- Conflicts of Interest: Policy changes allow secondary market purchases of issuers where the Manager's other funds also invest, potentially creating conflicts.
- Leverage: The CLO Fund warehouse is a leveraged investment; losses are paid first from net income and second from pledged capital.
- Market Risk: A hypothetical 1% change in interest rates could impact net assets from operations by approximately $0.2 million annually.
Investor Verification Checklist
- Delinquency Status: Verify the resolution of the IDI Acquisition Corp. coupon delinquency and potential default status.
- CLO Fund Closing: Confirm the successful closing of the CLO Fund in January 2008 and the release of the $3.1 million pledged collateral.
- Unrealized Losses: Monitor the valuation trends of significant unrealized loss positions, specifically EuroFresh Inc. and McMillin Companies LLC.
- Dividend Sustainability: Assess the ability to maintain dividend payouts given the net unrealized depreciation offsetting net investment income.
- Asset Coverage: Ensure the Company maintains the required 200% asset coverage ratio under the 1940 Act as leverage is utilized.