Business Context and Reporting Period
Company: GSC Investment Corp. (filing as SARATOGA INVESTMENT CORP. in metadata, but text confirms GSC Investment Corp.)
Filing Type: Form 10-K (Annual Report)
Period Ended: February 28, 2010
Business Model: A Maryland corporation elected as a Business Development Company (BDC) and Regulated Investment Company (RIC). The Company generates income through debt and equity investments in middle-market companies and high-yield bonds. It is externally managed by GSCP (NJ), L.P. ("GSC Group").
Key Financial Metrics
| Metric | Fiscal Year 2010 | Fiscal Year 2009 |
|---|---|---|
| Total Investment Income | $15.6 million | $23.4 million |
| Net Investment Income | $5.7 million | $13.8 million |
| Net Realized Gain/(Loss) | ($6.7 million) | ($7.1 million) |
| Net Unrealized Gain/(Loss) | ($9.5 million) | ($28.0 million) |
| Net Decrease in Net Assets from Operations | ($10.5 million) | ($21.3 million) |
| Portfolio Investments (Fair Value) | $89.4 million | $118.9 million |
| Total Debt Outstanding | $37.0 million | $59.0 million |
| Net Asset Value (NAV) per Share | $3.27 | $8.20 |
| Dividends Declared per Share | $1.83 | $1.03 |
Liquidity & Debt: The Company holds $3.4 million in cash and cash equivalents. It is in a continuing event of default under its $100 million Revolving Facility due to exceeding borrowing limits. The Borrowing Base was $1.7 million against $37.0 million in outstanding debt as of February 28, 2010.
Material Changes vs. Prior Period
- Revenue Decline: Total investment income decreased 33% to $15.6 million, driven by a smaller average portfolio size, a decrease in the effective interest rate on the GSCIC CLO investment, and an increased allowance for impaired loans.
- Expense Increase: Interest and credit facility expenses rose to $4.1 million (from $2.6 million) due to a higher interest rate triggered by the default status and a one-time write-off of deferred financing costs.
- Portfolio Deleveraging: The portfolio fair value decreased by approximately $29.5 million (25%) year-over-year. The Company made no new investments in fiscal 2010, with net repayments of $15.2 million.
- Asset Quality: Non-performing or delinquent investments increased significantly to $18.5 million (from $0.4 million in 2009). Approximately 71.2% of collateral was rated Caa2 or below by Moody's.
Guidance, Outlook, Risks, and Unusual Items
Going Concern & Default Status
The Company's independent auditors (Ernst & Young LLP) have expressed substantial doubt regarding the Company's ability to continue as a going concern. This is due to the continuing event of default under the Revolving Facility, which allows the lender to accelerate repayment and liquidate collateral. The Company is currently funding operations solely from cash on hand and management fees, as principal and interest proceeds from pledged assets are diverted to repay the facility.
Proposed Saratoga Transaction
On April 14, 2010, the Company entered into a definitive agreement for a $55 million recapitalization plan with Saratoga Investment Advisors, LLC. Key terms include:
- Issuance of ~9.9 million shares to Saratoga for $15 million ($1.52/share).
- Replacement of the existing credit facility with a new $40 million facility from Madison Capital Funding LLC.
- Replacement of the investment adviser (GSC Group) with Saratoga.
- Change of name to "Saratoga Investment Corp." and a proposed 1-for-10 reverse stock split.
Internal Control Weakness
Auditors identified a material weakness in internal controls over financial reporting related to the valuation reconciliation of complex investments. Management has requested additional support from GSC Group to remediate this issue.
Management Changes
The Company's CFO, Richard T. Allorto, Jr., announced his resignation effective July 15, 2010. GSC Group has reduced its employee count from 85 to 45 during the period.
Investor Verification Checklist
- Default Resolution: Verify the status of the proposed Saratoga Transaction and whether the $40 million replacement facility has been secured to cure the Revolving Facility default.
- Going Concern Status: Confirm if the auditors' "substantial doubt" qualification has been resolved in subsequent filings or if the lender has accelerated the debt.
- Portfolio Valuation: Review the specific valuation adjustments made to the GSCIC CLO investment and other distressed assets, given the material weakness in internal controls.
- Liquidity Runway: Assess current cash reserves against operating expenses and interest obligations in the event the Saratoga Transaction fails to close.
- Dividend Sustainability: Evaluate the ability to maintain RIC qualification and pay dividends given the suspension of quarterly dividends since January 2009 and the reliance on stock dividends.