Business Context and Reporting Period
Company: GSC Investment Corp. (Saratoga Investment Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2009
Business Overview: A non-diversified closed-end management investment company registered 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 select high-yield bonds.
Key Financial Metrics
| Metric | May 31, 2009 | Feb 28, 2009 |
|---|---|---|
| Total Assets | $135,801,090 | $130,662,479 |
| Total Liabilities | $62,423,497 | $62,648,702 |
| Stockholders' Equity (Net Assets) | $73,377,593 | $68,013,777 |
| Net Asset Value (NAV) per Share | $8.85 | $8.20 |
| Investments at Fair Value | $121,223,239 | $118,912,475 |
| Cash and Cash Equivalents | $8,544,000 | $6,356,225 |
| Revolving Credit Facility Outstanding | $57,755,257 | $58,994,673 |
Operating Performance (Three Months Ended May 31, 2009)
- Total Investment Income: $4,764,386 (Decreased from $5.7M in prior year period).
- Total Expenses (Net of Waivers): $2,200,397.
- Net Investment Income: $2,563,989.
- Net Realized Loss: $(5,152).
- Net Unrealized Appreciation: $2,769,292 (Investments) + $35,687 (Derivatives).
- Net Increase in Net Assets from Operations: $5,363,816.
- Earnings Per Share (Basic & Diluted): $0.65.
Material Changes vs. Prior Period
- Net Asset Value: NAV per share increased from $8.20 to $8.85, driven primarily by $2.8 million in net unrealized appreciation on investments, offsetting a decline in net investment income.
- Investment Income: Decreased by approximately 16.6% compared to the same period in 2008, attributed to lower LIBOR rates on floating-rate investments and an increase in the allowance for impaired loans.
- Operating Expenses: Decreased by 15.8% to $2.4 million (before waivers), primarily due to reduced interest expense from lower borrowings and decreased base management fees.
- Portfolio Composition: The portfolio remained relatively stable with 35 portfolio companies. Non-performing or delinquent investments increased from $0.4 million to $3.1 million.
- Dividends: No dividends were declared for the quarter ended May 31, 2009, whereas $0.39 per share was declared in the prior year period.
Guidance, Outlook, Risks, and Contingencies
Liquidity and Borrowing Base Violation
Critical Risk: Following the period end (as of June 30, 2009), the Company experienced a Borrowing Base violation of $17.4 million. This was caused by a $18.2 million decrease in the Borrowing Base due to downgrades and adverse events in four portfolio investments. The violation exceeds the Company's unrestricted cash of $10.3 million.
- Consequence: Failure to cure the violation within 30 days constitutes an event of default, potentially leading to the acceleration of debt and forced liquidation of pledged assets.
- Management Action: The Company is discussing a waiver and/or amendment of the Revolving Facility with its lender. There is no guarantee of favorable terms.
Investment Adviser Default
In April 2009, the Company's investment adviser (GSC Group) defaulted on its own credit facility by withholding a principal amortization payment. While this does not directly constitute a default for GSC Investment Corp., a material adverse change in the adviser's condition could trigger a default under the Company's Revolving Facility.
Dividend Policy
The Board determined not to pay a dividend for the fourth quarter of fiscal year 2009 to better manage capital in light of credit market volatility. Future dividends remain at the Board's discretion.
Strategic Review
The Company retained Stifel, Nicolaus & Company to evaluate strategic and financing alternatives, though no transaction is guaranteed.
Investor Verification Checklist
- Borrowing Base Cure: Verify if the Company has successfully obtained a waiver or amendment from its lender to cure the $17.4 million Borrowing Base violation reported as of June 30, 2009.
- Investment Adviser Status: Monitor the restructuring progress of the investment adviser's credit facility default and its potential impact on the Company's Revolving Facility.
- Portfolio Credit Quality: Review the specific details of the four portfolio investments that triggered the Borrowing Base decline and assess the risk of further downgrades.
- Dividend Sustainability: Confirm the Board's decision regarding dividends for the first quarter of fiscal year 2010 given the liquidity constraints.
- Asset Coverage Ratio: Verify the current asset coverage ratio (227% as of May 31, 2009) remains above the 200% regulatory minimum required for BDCs.