Business Context and Reporting Period
Company: GSC Investment Corp. (Saratoga Investment Corp. in metadata, but filing identifies GSC Investment Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 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 debt and equity securities of middle-market companies and high-yield bonds.
Key Financial Metrics
| Metric | Nine Months Ended Nov 30, 2009 | Three Months Ended Nov 30, 2009 |
|---|---|---|
| Total Investment Income | $11,979,887 | $3,530,143 |
| Total Expenses (Net of Waiver) | $7,467,049 | $2,661,052 |
| Net Investment Income | $4,512,838 | $869,091 |
| Net Realized Loss | $(1,579,812) | $(549,864) |
| Net Unrealized Depreciation | $(4,562,979) | $8,825,100 (Appreciation) |
| Net Increase (Decrease) in Net Assets | $(1,596,873) | $9,127,573 |
| Net Asset Value (NAV) per Share | $3.80 | $3.80 |
| Weighted Avg. EPS (Basic/Diluted) | $(0.19) | $1.01 |
| Total Assets | $114,536,216 | $114,536,216 |
| Total Liabilities | $50,192,377 | $50,192,377 |
| Total Net Assets | $64,343,839 | $64,343,839 |
| Revolving Credit Facility Outstanding | $43,840,749 | $43,840,749 |
| Cash and Cash Equivalents | $5,459,780 | $5,459,780 |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased 33.1% for the nine months ended Nov 30, 2009, compared to the prior year. This was driven by a $1.9 million increase in the allowance for impaired loans, reduced income from sold investments, and lower LIBOR rates.
- Expense Increase: Interest and credit facility expenses rose significantly due to an event of default on July 30, 2009, which triggered a higher interest rate (9.25% for the quarter) and a $0.5 million write-off of deferred financing costs.
- Portfolio Valuation: While the nine-month period showed a net unrealized depreciation of $4.6 million, the third quarter alone saw a net unrealized appreciation of $8.8 million, largely due to market-wide yield decreases and improved outlooks for specific portfolio companies (e.g., Terphane Holdings, McMillin Companies).
- Debt Reduction: Borrowings under the Revolving Facility decreased from $59.0 million (Feb 28, 2009) to $43.8 million (Nov 30, 2009) due to the commencement of a two-year amortization period and principal repayments.
Guidance, Outlook, Risks, and Unusual Items
- Event of Default: The Company is in a continuing event of default under its Revolving Facility due to exceeding borrowing limits. The lender has the right to accelerate repayment and liquidate collateral. While the lender has not accelerated debt to date, forced liquidation could result in asset sales below fair value.
- Liquidity Constraints: Due to the default, all interest proceeds from pledged assets are diverted to repay the facility. The Company must fund operations and dividends solely from cash on hand, management fees, and proceeds from its GSCIC CLO investment.
- Strategic Review: The Company has retained Stifel, Nicolaus & Company to evaluate strategic transaction opportunities and alternatives to resolve the default.
- Dividend Policy: A dividend of $1.825 per share was declared on Nov 13, 2009. Due to cash limits, the dividend was paid as a combination of cash ($2.1 million) and stock (8.65 million shares), resulting in a 104% increase in outstanding shares.
- Non-Performing Assets: As of Nov 30, 2009, $21.8 million (21.1% of the portfolio) was classified as non-performing or delinquent, including significant positions in Terphane Holdings Corp. and Jason Incorporated.
Investor Verification Checklist
- Default Resolution: Verify the status of negotiations with the lender regarding the Revolving Facility default and the risk of forced asset liquidation.
- Liquidity Sufficiency: Confirm that cash on hand and CLO proceeds are sufficient to cover operating expenses and future dividend requirements without further asset sales.
- Portfolio Quality: Review the specific credit status of the $21.8 million in non-performing assets, particularly Terphane Holdings and Jason Incorporated.
- Share Dilution: Assess the impact of the recent stock dividend (104% increase in shares) on future per-share earnings and NAV.
- Asset Coverage: Monitor the asset coverage ratio (247% as of Nov 30, 2009) to ensure continued compliance with the 1940 Act requirements (minimum 200%).