Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended November 30, 2012
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 1-33376
SARATOGA INVESTMENT CORP.
(Exact name of registrant as specified in its charter)
Maryland
20-8700615
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
535 Madison Avenue New York, New York
10022
(Address of principal executive office)
(Zip Code)
(212) 906-7800
(Registrant’s telephone number, including area code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer x
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of January 14, 2013 was 4,730,116.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 2012
TABLE OF CONTENTS
Page
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Statements of Assets and Liabilities as of November 30, 2012 (unaudited) and February 29, 2012
3
Consolidated Statements of Operations for the three and nine months ended November 30, 2012 and 2011 (unaudited)
4
Consolidated Schedules of Investments as of November 30, 2012 (unaudited) and February 29, 2012
5
Consolidated Statements of Changes in Net Assets for the nine months ended November 30, 2012 and 2011 (unaudited)
8
Consolidated Statements of Cash Flows for the nine months ended November 30, 2012 and 2011 (unaudited)
9
Notes to Consolidated Financial Statements as of November 30, 2012 (unaudited)
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
47
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
48
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
50
2
Saratoga Investment Corp.
Consolidated Statements of Assets and Liabilities
As of
November 30, 2012
February 29, 2012
(unaudited)
ASSETS
Investments at fair value
Non-control/non-affiliate investments (amortized cost of $97,083,018 and $73,161,722, respectively)
$
94,649,656
69,513,434
Control investments (cost of $20,361,593 and $23,540,517, respectively)
24,641,107
25,846,414
Total investments at fair value (amortized cost of $117,444,611 and $96,702,239, respectively)
119,290,763
95,359,848
Cash and cash equivalents
2,494,552
1,325,698
Cash and cash equivalents, reserve accounts
3,787,183
25,534,195
Outstanding interest rate cap at fair value (cost of $0 and $131,000, respectively)
—
75
Interest receivable, (net of reserve of $228,113 and $273,361, respectively)
1,906,186
1,689,404
Deferred credit facility financing costs, net
1,453,985
1,199,490
Management fee receivable
216,947
227,581
Other assets
18,973
94,823
Receivable from unsettled trades
59,511
Total assets
129,168,589
125,490,625
LIABILITIES
Revolving credit facility
14,850,000
20,000,000
SBA debentures payable
4,000,000
Payable for unsettled trades
4,072,500
Dividend payable
3,295,306
Management and incentive fees payable
3,364,719
2,885,670
Accounts payable and accrued expenses
508,042
704,949
Interest and credit facility fees payable
140,424
53,262
Due to manager
117,877
394,094
Total liabilities
26,276,368
28,110,475
NET ASSETS
Common stock, par value $.001, 100,000,000 common shares authorized, 4,730,116 and 3,876,661 common shares issued and outstanding, respectively
4,730
3,877
Capital in excess of par value
174,824,076
161,644,426
Distribution in excess of net investment income
(25,319,688
)
(13,920,068
Accumulated net realized loss from investments and derivatives
(48,463,047
(48,874,767
Net unrealized appreciation (depreciation) on investments and derivatives
1,846,150
(1,473,318
Total Net Assets
102,892,221
97,380,150
Total liabilities and Net Assets
NET ASSET VALUE PER SHARE
21.75
25.12
See accompanying notes to consolidated financial statements.
Consolidated Statements of Operations
For the three months ended November 30,
For the nine months ended November 30,
2012
2011
INVESTMENT INCOME
Interest from investments
Non-control/Non-affiliate investments
2,466,595
1,877,650
6,951,338
5,212,182
Control investments
1,046,285
1,155,241
3,186,751
3,095,304
Total interest income
3,512,880
3,032,891
10,138,089
8,307,486
Interest from cash and cash equivalents
731
1,567
5,368
6,815
Management fee income
500,454
501,920
1,500,519
1,512,091
Other income
19,750
92,671
172,310
238,579
Total investment income
4,033,815
3,629,049
11,816,286
10,064,971
EXPENSES
Interest and credit facility financing expenses
529,858
307,221
1,808,586
987,042
Base management fees
528,735
393,888
1,492,345
1,203,820
Professional fees
347,459
356,144
986,781
1,282,009
Administrator expenses
250,000
750,000
730,000
Incentive management fees
(412,654
1,178,750
887,020
842,097
Insurance
128,891
145,105
389,506
448,786
Directors fees and expenses
53,705
51,000
155,705
153,000
General & administrative
117,357
121,019
265,720
290,232
Other expense
1,311
2,150
4,434
5,340
Total expenses
1,544,662
2,805,277
6,740,097
5,942,326
NET INVESTMENT INCOME
2,489,153
823,772
5,076,189
4,122,645
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from investments
95,372
(5,831,905
542,720
(5,839,864
Net realized loss from derivatives
(131,000
Net unrealized appreciation (depreciation) on investments
(1,838,957
11,221,387
3,188,543
11,927,052
Net unrealized appreciation (depreciation) on derivatives
166
130,925
(15,108
Net gain (loss) on investments
(1,743,585
5,389,648
3,731,188
6,072,080
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
745,568
6,213,420
8,807,377
10,194,725
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
0.19
1.88
2.25
3.10
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED
3,970,447
3,310,021
3,907,696
3,287,979
Consolidated Schedule of Investments
Company (a)
Industry
Investment Interest Rate/Maturity
Principal/ Number of Shares
Cost
Fair Value (c)
% of Net Assets
Non-control/Non-affiliated investments - 92.0% (b)
Coast Plating, Inc. (d)
Aerospace
First Lien Term Loan 11.71% Cash, 9/13/2014
2,550,000
2.5
%
First Lien Term Loan 12.46% Cash, 9/13/2014
950,000
0.9
Total Aerospace
3,500,000
3.4
National Truck Protection Co., Inc. (d, h)
Automotive
Common Stock
589
500,000
564,507
0.5
National Truck Protection Co., Inc. (d)
First Lien Term Loan, 15.50% Cash, 8/10/2017
5,500,000
5.3
Take 5 Oil Change, L.L.C. (d)
First Lien Term Loan 9.00% Cash, 11/28/2016
6,400,000
6.2
Take 5 Oil Change, L.L.C. (d, h)
7,128
712,800
742,738
0.7
Total Automotive
13,112,800
13,207,245
12.7
Legacy Cabinets Holdings (d, h)
Building Products
Common Stock Voting A-1
2,535
220,900
0.0
Common Stock Voting B-1
1,600
139,424
Legacy Cabinets, Inc. (d)
First Lien Term Loan 7.25% (1.00% Cash/6.25% PIK), 5/3/2014
326,980
255,731
0.2
Total Building Products
687,304
Knowland Technology Holdings, L.L.C. (d)
Business Services
First Lien Term Loan 11.00% Cash, 11/29/2017
6,200,000
6,076,136
6.0
Sourcehov LLC (d)
Second Lien Term Loan 10.50% Cash, 4/30/2018
3,000,000
2,631,515
2,715,000
2.6
Total Business Services
8,707,651
8,915,000
8.6
C.H.I. Overhead Doors, Inc. (CHI) (d)
Consumer Products
First Lien Term Loan 7.25% Cash, 8/17/2017
4,987,374
4,940,497
4.8
Targus Group International, Inc. (d)
First Lien Term Loan 11.00% Cash, 5/24/2016
3,950,000
3,894,385
3,959,875
3.8
Targus Holdings, Inc. (d)
Unsecured Notes 10.00% PIK, 6/14/2019
1,799,479
1,027,683
1.0
Unsecured Notes 16.00% Cash, 10/26/2018
319,711
312,359
292,631
0.3
Targus Holdings, Inc. (d, h)
62,413
566,765
3,731,673
3.6
Total Consumer Products
11,513,485
13,999,236
13.5
CFF Acquisition LLC (d)
Consumer Services
First Lien Term Loan 7.50% Cash, 7/31/2015
2,435,516
2,274,911
2,353,439
2.3
PrePaid Legal Services, Inc. (d)
First Lien Term Loan 11.00% Cash, 12/31/2016
2,932,804
2,919,900
2.8
Total Consumer Services
5,207,715
5,273,339
5.1
M/C Acquisition Corp., LLC (d)
Education
First Lien Term Loan 8.75% (6.75% Cash/2.00% PIK), 12/31/2012
2,780,315
1,626,380
323,629
M/C Acquisition Corp., LLC (d, h)
Class A Common Stock
544,761
30,242
Total Education
1,656,622
Group Dekko, Inc. (d)
Electronics
Second Lien Term Loan 10.50% (6.50% Cash/4.00% PIK), 5/1/2013
7,804,794
7,323,238
7.1
Total Electronics
USS Parent Holding Corp. (d, h)
Environmental
Non Voting Common Stock
765
133,002
115,681
0.1
Voting Common Stock
17,396
3,025,798
2,631,735
Total Environmental
3,158,800
2,747,416
2.7
DS Waters of America, Inc. (d)
Food and Beverage
First Lien Term Loan 10.50% Cash, 8/29/2017
3,980,000
4,006,126
4,089,450
4.0
HOA Restaurant Group, LLC. (d)
Senior Secured Notes 11.25% Cash, 4/1/2017
3,892,643
3,560,000
3.5
TM Restaurant Group LLC (d)
First Lien Term Loan 7.75% Cash, 7/16/2017
2,981,250
2,960,569
2,977,672
2.9
Total Food and Beverage
10,859,338
10,627,122
10.4
Maverick Healthcare Group (d)
Healthcare Services
First Lien Term Loan 10.75% Cash, 12/31/2016
4,912,500
4,843,563
4,887,937
Total Healthcare Services
McMillin Companies LLC (d, h)
Homebuilding
Senior Secured Notes 0% Cash, 12/31/2013
550,000
530,535
289,465
Total Homebuilding
Capstone Logistics, LLC (d)
Logistics
First Lien Term Loan 7.50% Cash, 9/16/2016
987,809
976,102
First Lien Term Loan 13.50% Cash, 9/16/2016
3,952,596
3.9
Worldwide Express Operations, LLC (d)
First Lien Term Loan 7.50% Cash, 6/30/2013
6,546,441
6,430,154
6,465,920
6.3
Total Logistics
11,358,852
11,453,729
11.2
Elyria Foundry Company, LLC (d)
Metals
Senior Secured Notes 17.00% (13.00% Cash/4.00% PIK), 3/1/2013
7,728,566
7,657,604
6,641,156
6.5
Elyria Foundry Company, LLC (d, h)
Warrants to Purchase Limited Liability Company Interests
3,000
Total Metals
Network Communications, Inc. (d)
Publishing
Unsecured Notes 8.60% PIK, 1/14/2020
2,494,810
2,042,031
920,585
Network Communications, Inc. (d, h)
211,429
Penton Media, Inc. (d)
First Lien Term Loan 5.00% Cash, 8/1/2014
4,838,880
4,441,924
4,284,828
4.3
Total Publishing
6,483,955
5,205,413
5.2
Sub Total Non-control/Non-affiliated investments
97,083,018
92.0
Control investments - 23.9% (b)
GSC Partners CDO GP III, LP (g, h)
Financial Services
100% General Partnership Interest
GSC Investment Corp. CLO 2007 LTD. (d, e, g)
Structured Finance Securities
Other/Structured Finance Securities 18.81%, 1/21/2020
30,000,000
20,361,593
23.9
Sub Total Control investments
Affiliate investments - 0.0% (b)
GSC Partners CDO GP III, LP (f, h)
6.24% Limited Partnership Interest
Sub Total Affiliate investments
TOTAL INVESTMENTS - 115.9% (b)
117,444,611
115.9
(a) All of our equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except GSC Investment Corp. CLO 2007 Ltd. and GSC Partners CDO GP III, LP.
(b) Percentages are based on net assets of $102,892,221 as of November 30, 2012.
(c) Because there is no readily available market value for these investments, the fair value of these investments is approved in good faith by our board of directors. (see Note 3 to the consolidated financial statements).
(d) These securities are pledged as collateral under a senior secured revolving credit facility (see Note 6 to the consolidated financial statements).
(e) 18.81% represents the modeled effective interest rate that is expected to be earned over the life of the investment.
(f) As defined in the Investment Company Act, we are an “Affiliate” of this portfolio company because we own 5% or more of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was an Affiliate are as follows:
Interest
Management
Net Realized
Net Unrealized
Company
Purchases
Redemptions
Sales (cost)
Income
fee income
gains/(losses)
GSC Partners CDO GP III, LP
(g) As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:
GSC Investment Corp. CLO 2007 LTD.
4,279,514
(h) Non-income producing at November 30, 2012.
Company(a)
Fair Value(c)
Non-control/Non-affiliated investments—71.4%(b)
Coast Plating, Inc.(d)
First Lien Term Loan 11.77% Cash, 9/13/2014
First Lien Term Loan 12.52% Cash, 9/13/2014
Legacy Cabinets Holdings(d)(h)
Legacy Cabinets, Inc.(d)
312,198
221,629
672,522
Targus Group International, Inc.(d)
3,911,828
3,944,976
4.1
Targus Holdings, Inc.(d)
963,621
Targus Holdings, Inc.(d)(h)
2,675,645
6,278,072
7,584,242
7.8
CFF Acquisition LLC(d)
2,684,141
2,462,831
2,448,205
PrePaid Legal Services, Inc.(d)
2,920,411
2,940,000
3.0
5,383,242
5,388,205
5.5
M/C Acquisition Corp., LLC(d)
First Lien Term Loan 10.00% (4.25% Cash/5.75% PIK), 12/31/2012
2,944,596
1,790,662
591,864
0.6
M/C Acquisition Corp., LLC(d)(h)
1,820,904
Advanced Lighting Technologies, Inc.(d)
Second Lien Term Loan 6.25% Cash, 6/1/2014
2,000,000
1,902,053
1,910,400
2.0
Group Dekko, Inc.(d)
7,571,152
7,003,316
7.2
9,473,205
8,913,716
9.2
USS Parent Holding Corp.(d)(h)
97,810
2,225,180
2,322,990
2.4
DCS Business Services, Inc.(d)
First Lien Term Loan 14.00% Cash, 9/30/2012
1,600,000
1,604,464
1.6
Big Train, Inc.(d)
First Lien Term Loan 7.75% Cash, 3/31/2012
1,406,768
1,389,640
1,368,785
1.4
HOA Restaurant Group, LLC.(d)
3,880,000
5,269,640
5,248,785
5.4
Maverick Healthcare Group(d)
4,950,000
4,867,725
4,824,270
5.0
McMillin Companies LLC(d)(h)
511,952
288,915
Capstone Logistics, LLC(d)
997,118
982,954
3,943,183
Worldwide Express Operations, LLC(d)
6,680,276
6,412,355
6,103,100
11,338,492
11,100,218
11.4
Sabre Industries, Inc(d)
Manufacturing
Senior Unsecured Loan 15.00% (12.00% Cash/3.00% PIK), 6/6/2016
6,000,000
5,852,741
Elyria Foundry Company, LLC(d)
7,428,456
7,224,787
6,537,041
6.7
Elyria Foundry Company, LLC(d)(h)
Network Communications, Inc.(d)
2,422,095
1,924,577
1,044,892
Network Communications, Inc.(d)(h)
691,373
Penton Media, Inc.(d)
First Lien Term Loan 5.00% (4.00% Cash/ 1.00% PIK), 8/1/2014
4,839,526
4,280,599
3,655,294
6,205,176
5,391,559
73,161,722
71.4
Control investments—26.5%(b)
GSC Partners CDO GP III, LP(g)(h)
GSC Investment Corp. CLO 2007 LTD.(d)(e)(g)
Other/Structured Finance Securities 17.38%, 1/21/2020
23,540,517
26.5
Affiliate investments—0.0%(b)
GSC Partners CDO GP III, LP(f)(h)
TOTAL INVESTMENTS—97.9%(b)
96,702,239
97.9
6
Outstanding interest rate cap
Interest rate
Maturity
Notional
Fair Value
Interest rate cap
8.0
2/9/2014
19,591,837
87,000
54
11/30/2013
10,332,000
44,000
21
Total Outstanding interest rate cap
131,000
*
Amounts to less than 0.05%
(a)
All of our equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except GSC Investment Corp. CLO 2007 Ltd. and GSC Partners CDO GP III, LP.
(b)
Percentages are based on net assets of $97,380,150 as of February 29, 2012.
(c)
Because there is no readily available market value for these investments, the fair value of these investments is approved in good faith by our board of directors. (see Note 3 to the consolidated financial statements).
(d)
These securities are pledged as collateral under a senior secured revolving credit facility (see Note 6 to the consolidated financial statements).
(e)
17.38% represents the modeled effective interest rate that is expected to be earned over the life of the investment.
(f)
As defined in the Investment Company Act, we are an “Affiliate” of this portfolio company because we own 5% or more of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was an Affiliate are as follows:
Interest Income
Net Realized gains/(losses)
Net Unrealized gains/(losses)
(g)
As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:
4,198,007
2,011,516
6,938,209
(h)
Non-income producing at February 29, 2012.
7
Consolidated Statements of Changes in Net Assets
For the nine months ended November 30, 2012
For the nine months ended November 30, 2011
INCREASE FROM OPERATIONS:
Net investment income
Net unrealized appreciation on investments
Net increase in net assets from operations
DECREASE FROM SHAREHOLDER DISTRIBUTIONS:
Distributions declared
(16,475,809
(9,831,231
Net decrease in net assets from shareholder distributions
CAPITAL SHARE TRANSACTIONS:
Stock dividend distribution
13,180,503
7,864,784
Net increase in net assets from capital share transactions
Total increase in net assets
5,512,071
8,228,278
Net assets at beginning of period
86,071,454
Net assets at end of period
94,299,732
Net asset value per common share
24.32
Common shares outstanding at end of period
4,730,116
3,876,661
(14,627,476
Consolidated Statements of Cash Flows
Operating activities
NET INCREASE IN NET ASSETS FROM OPERATIONS
ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Paid-in-kind interest income
(821,830
(1,188,674
Net accretion of discount on investments
(710,418
(1,002,986
Amortization of deferred credit facility financing costs
342,505
510,376
Net realized (gain) loss from investments
(542,720
5,839,864
(3,188,543
(11,927,052
Net unrealized (appreciation) depreciation on derivatives
(130,925
15,108
Proceeds from sale and redemption of investments
15,990,963
31,873,349
Purchase of investments
(34,658,367
(28,948,936
(Increase) decrease in operating assets:
21,747,012
3,536,441
Interest receivable
(216,782
370,286
10,634
4,291
75,850
(2,880,897
Increase (decrease) in operating liabilities:
(4,072,500
(4,900,000
479,049
287,095
(196,907
(99,496
87,162
(21,959
(276,217
44,580
NET CASH PROVIDED BY OPERATING ACTIVITIES
2,915,854
1,706,115
Financing activities
Borrowings on debt
7,350,000
Paydowns on debt
(8,500,000
(4,500,000
Credit facility financing cost
(597,000
NET CASH USED BY FINANCING ACTIVITIES
(1,747,000
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1,168,854
(2,793,885
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
10,735,755
CASH AND CASH EQUIVALENTS, END OF PERIOD
7,941,870
Supplemental Information:
Interest paid during the period
1,378,919
498,625
Supplemental non-cash information:
821,830
1,188,674
710,418
1,002,986
Cash dividend payable
1,966,447
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Saratoga Investment Corp. (the “Company”, “we”, “our” and “us”) is a non-diversified closed end management investment company incorporated in Maryland that has elected to be treated and is regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). We commenced operations on March 23, 2007 as GSC Investment Corp. and completed our initial public offering (“IPO”) on March 28, 2007. We have elected to be treated as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code (the “Code”). We expect to continue to qualify and to elect to be treated for tax purposes as a RIC. Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments.
GSC Investment, LLC (the “LLC”) was organized in May 2006 as a Maryland limited liability company. As of February 28, 2007, the LLC had not yet commenced its operations and investment activities.
On March 21, 2007, the Company was incorporated and concurrently therewith the LLC was merged with and into the Company, with the Company as the surviving entity, in accordance with the procedure for such merger in the LLC’s limited liability company agreement and Maryland law. In connection with such merger, each outstanding limited liability company interest of the LLC was converted into a share of common stock of the Company.
On July 30, 2010, the Company changed its name from “GSC Investment Corp.” to “Saratoga Investment Corp.” in conjunction with the transaction described in “Note 12. Recapitalization Transaction” below.
We are externally managed and advised by our investment adviser, Saratoga Investment Advisors, LLC (the “Manager”), pursuant to an investment advisory and management agreement. Prior to July 30, 2010, we were managed and advised by GSCP (NJ), L.P.
On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP (“SBIC LP”), received a Small Business Investment Company (“SBIC”) license from the Small Business Administration (“SBA”).
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries, Saratoga Investment Funding, LLC (previously known as GSC Investment Funding LLC) and SBIC LP. All intercompany accounts and transactions have been eliminated in consolidation. All references made to the “Company,” “we,” and “us” herein include Saratoga Investment Corp. and its consolidated subsidiaries, except as stated otherwise.
Note 2. Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and income, gains/(losses) and expenses during the period reported. Actual results could differ materially from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, liquid investments in a money market fund. Cash and cash equivalents are carried at cost which approximates fair value. Pursuant to section 12(d)(1)(A) of the 1940 Act, the Company may not invest in another registered investment company such as a money market fund if such investment would cause the Company to exceed any of the following limitations:
· we were to own more than 3% of the total outstanding voting stock of the money market fund;
· we were to hold securities in the money market fund having an aggregate value in excess of 5% of the value of our total assets; or
· we were to hold securities in money market funds and other registered investment companies and BDCs having an aggregate value in excess of 10% of the value of our total assets.
Cash and Cash Equivalents, Reserve Accounts
Cash and cash equivalents, reserve accounts include amounts held in designated bank accounts in the form of cash and short-term liquid investments in money market funds representing payments received on secured investments or other reserved amounts associated with our $45 million senior secured revolving credit facility with Madison Capital Funding LLC. The Company is required to use these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the terms of the senior secured revolving credit facility.
Investment Classification
The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which we own more than 25% of the voting securities or maintain greater than 50% of the board representation. Under the 1940 Act, “Affiliated Investments” are defined as those non-control investments in companies in which we own between 5% and 25% of the voting securities. Under the 1940 Act, “Non-affiliated Investments” are defined as investments that are neither Control Investments nor Affiliated Investments.
Investment Valuation
The Company accounts for its investments at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires the Company to assume that its investments are to be sold at the statement of assets and liabilities date in the principal market to independent market participants, or in the absence of a principal market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.
Investments for which market quotations are readily available are fair valued at such market quotations obtained from independent third party pricing services and market makers subject to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations are not readily available at fair value as approved, in good faith, by our board of directors based on input from our Manager, the audit committee of our board of directors and a third party independent valuation firm. Determinations of fair value may involve subjective judgments and estimates. The types of factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors.
We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:
· Each investment is initially valued by the responsible investment professionals of our Manager and preliminary valuation conclusions are documented and discussed with the senior management of our Manager; and
· An independent valuation firm engaged by our board of directors reviews approximately one quarter of these preliminary valuations each quarter so that the valuation of each investment for which market quotes are not readily available is reviewed by the independent valuation firm at least annually.
In addition, all our investments are subject to the following valuation process:
11
· The audit committee of our board of directors reviews each preliminary valuation and our Manager and independent valuation firm (if applicable) will supplement the preliminary valuation to reflect any comments provided by the audit committee; and
· Our board of directors discusses the valuations and approves the fair value of each investment, in good faith, based on the input of our Manager, independent valuation firm (to the extent applicable) and the audit committee of our board of directors.
Our investment in GSC Investment Corp. CLO 2007, Ltd. (“Saratoga CLO”) is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flows analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO.
Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.
Derivative Financial Instruments
We account for derivative financial instruments in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). ASC 815 requires recognizing all derivative instruments as either assets or liabilities on the consolidated statements of assets and liabilities at fair value. The Company values derivative contracts at the closing fair value provided by the counterparty. Changes in the values of derivative contracts are included in the consolidated statements of operations.
Investment Transactions and Income Recognition
Purchases and sales of investments and the related realized gains or losses are recorded on a trade-date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. Discounts and premiums on investments purchased are accreted/amortized over the life of the respective investment using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortizations of premium on investments.
Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as a reduction in principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.
Interest income on our investment in Saratoga CLO is recorded using the effective interest method in accordance with the provisions of ASC Topic 325-40, Investments-Other, Beneficial Interests in Securitized Financial Assets, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.
Paid-in-Kind Interest
The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at
12
maturity, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We stop accruing PIK interest if we do not expect the issuer to be able to pay all principal and interest when due.
Deferred Credit Facility Financing Costs
Financing costs incurred in connection with our credit facility are deferred and amortized using the straight line method over the life of the facility.
Contingencies
In the ordinary course of its business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Company. Based on its history and experience, management feels that the likelihood of such an event is remote.
In the ordinary course of business, the Company may directly or indirectly be a defendant or plaintiff in legal actions with respect to bankruptcy, insolvency or other types of proceedings. Such lawsuits may involve claims that could adversely affect the value of certain financial instruments owned by the Company.
Income Taxes
The Company has filed an election to be treated for tax purposes as a RIC under Subchapter M of the Code and, among other things, intends to make the requisite distributions to its stockholders which will relieve the Company from federal income taxes. Therefore, no provision has been recorded for the obligation to pay federal income taxes.
In order to qualify as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least 90% of its investment company taxable income, as defined by the Code, for each fiscal tax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31.
Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned.
In accordance with certain applicable Treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash will receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock.
ASC 740, Income Taxes provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statement of operations. As of November 30, 2012 and February 29, 2012, there were no uncertain tax positions.
Dividends
Dividends to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is approved by the board of directors. Net realized capital gains, if any, are generally distributed at least annually, although we may decide to retain such capital gains for reinvestment.
13
We have adopted a dividend reinvestment plan that provides for reinvestment of our dividend distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends. If our common stock is trading below net asset value at the time of valuation, the plan administrator may receive the dividend or distribution in cash and purchase common stock in the open market, on the New York Stock Exchange or elsewhere, for the account of each participant in our dividend reinvestment plan.
Capital Gains Incentive Fee
The Company records an expense accrual relating to the capital gains incentive fee payable by the Company to its investment adviser when the unrealized gains on its investments exceed all realized capital losses on its investments given the fact that a capital gains incentive fee would be owed to the investment adviser if the Company were to liquidate its investment portfolio at such time. The actual incentive fee payable to the Company’s investment adviser related to capital gains will be determined and payable in arrears at the end of each fiscal year and will include only realized capital gains for the period.
New Accounting Pronouncements
In December 2011, the FASB issued (“ASU”) No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires entities to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance is effective for fiscal years and interim periods beginning on or after January 1, 2013 with retrospective application for all comparative periods presented. The adoption of this guidance, which is related to disclosure only, is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Risk Management
In the ordinary course of its business, the Company manages a variety of risks, including market risk and credit risk. Market risk is the risk of potential adverse changes to the value of investments because of changes in market conditions such as interest rate movements and volatility in investment prices.
Credit risk is the risk of default or non-performance by portfolio companies, equivalent to the investment’s carrying amount.
The Company is also exposed to credit risk related to maintaining all of its cash and cash equivalents, including those in reserve accounts, at a major financial institution and credit risk related to any of its derivative counterparties.
The Company has investments in lower rated and comparable quality unrated high yield bonds and bank loans. Investments in high yield investments are accompanied by a greater degree of credit risk. The risk of loss due to default by the issuer is significantly greater for holders of high yield securities, because such investments are generally unsecured and are often subordinated to other creditors of the issuer.
Note 3. Investments
As noted above, the Company values all investments in accordance with ASC 820. ASC 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability
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of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:
· Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
· Level 2—Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable.
· Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs used in the determination of fair value may require significant management judgment or estimation. Such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as a Level 3 asset, assuming no additional corroborating evidence.
In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by the board of directors that is consistent with ASC 820 and the 1940 Act (see Note 2). Consistent with our Company’s valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.
The following table presents fair value measurements of investments, by major class, as of November 30, 2012 (dollars in thousands), according to the fair value hierarchy:
Fair Value Measurements
Level 1
Level 2
Level 3
Total
First lien term loans
64,094
Second lien term loans
10,038
Senior secured notes
10,491
Unsecured notes
2,241
Structured finance securities
24,641
Equity interests
7,786
Limited partnership interests
119,291
The following table presents fair value measurements of investments, by major class, as of February 29, 2012 (dollars in thousands), according to the fair value hierarchy:
36,196
8,914
10,706
Senior unsecured loans
6,000
2,008
25,846
5,690
95,360
15
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the nine months ended November 30, 2012 (dollars in thousands):
Common stock/equities
Balance as of February 29, 2012
Net unrealized gains (losses)
1,194
161
(679
(148
(197
1,974
884
3,189
Purchases and other adjustments to cost
31,069
2,908
464
107
430
1,212
36,190
Sales and redemptions
(4,544
(2,032
(6,090
(3,179
(146
(15,991
Net realized gain from investments
179
87
131
146
543
Balance as of November 30, 2012
Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK.
Sales and redemptions represent net proceeds received from investments sold, and principal paydowns received, during the period.
The net change in unrealized gain/(loss) on investments held as of November 30, 2012 is $3.3 million and is included in net unrealized appreciation (depreciation) on investments in the consolidated statements of operations.
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of November 30, 2012 were as follows (dollars in thousands):
Valuation Technique
Unobservable Input
Range
Market Comparables
Market Yield (%)
6.4% - 25.6%
EBITDA Multiples (x)
3.0x
Market Quotes
Third-Party Bid
88.6 - 102.8
13.7%
90.5
42.5%
4.8x
89.0
18.0% - 24.2%
Discounted Cash Flow
Discount Rate (%)
13.0%
3.0x - 7.0x
For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the EBITDA valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement.
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The composition of our investments as of November 30, 2012, at amortized cost and fair value were as follows (dollars in thousands):
Investments at Amortized Cost
Amortized Cost Percentage of Total Portfolio
Investments at Fair Value
Fair Value Percentage of Total Portfolio
65,083
55.4
53.7
10,436
8.9
8.4
12,081
10.3
8.8
4,154
1.9
20,362
17.4
20.7
5,329
4.5
117,445
100
The composition of our investments as of February 29, 2012, at amortized cost and fair value were as follows (dollars in thousands):
38,379
39.7
38.0
9,473
9.8
9.4
11,617
12.0
5,852
6.1
3,724
2.1
23,541
24.3
27.1
4,116
5.9
96,702
100.0
For loans and debt securities for which market quotations are not available, we determine their fair value based on third party indicative broker quotes, where available, or the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield valuation methodology. In applying the market yield valuation methodology, we determine the fair value based on such factors as market participant assumptions including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. If, in our judgment, the market yield methodology is not sufficient or appropriate, we may use additional methodologies such as an asset liquidation or expected recovery model.
For equity securities of portfolio companies and partnership interests, we determine the fair value of the portfolio company based on the market approach with value then attributed to equity or equity like securities using the enterprise value waterfall valuation methodology. Under the enterprise value waterfall valuation methodology, we determine the enterprise fair value of the portfolio company and then waterfall the enterprise value over the portfolio company’s securities in order of their preference relative to one another. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities. We also take into account historical and anticipated financial results.
Our investment in Saratoga CLO is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of
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directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. We used the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flows analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO at November 30, 2012. The significant inputs for the valuation model included:
· Default rates: 3.0%
· Recovery rates: 70% loans; 35% bonds
· Reinvestment rates: LIBOR plus 350 basis points
· Prepayment rate: 20%
Note 4. Investment in GSC Investment Corp. CLO 2007, Ltd. (“Saratoga CLO”)
On January 22, 2008, we invested $30 million in all of the outstanding subordinated notes of Saratoga CLO (which are referred in the unaudited balance sheet of Saratoga CLO below as “Preference shares”), a collateralized loan obligation fund managed by us that invests primarily in senior secured loans. Additionally, we entered into a collateral management agreement with Saratoga CLO pursuant to which we act as collateral manager to it. In return for our collateral management services, we are entitled to a senior collateral management fee of 0.10% and a subordinate collateral management fee of 0.40% of the outstanding principal amount of Saratoga CLO’s assets, to be paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20% of excess cash flow to the extent the Saratoga CLO subordinated notes receive an internal rate of return equal to or greater than 12%. For the three months ended November 30, 2012 and 2011, we accrued $0.5 million and $0.5 million in collateral management fee income, respectively, due from Saratoga CLO and $1.0 million and $1.2 million in interest income, respectively, due from Saratoga CLO. For the nine months ended November 30, 2012 and 2011, we accrued $1.5 million and $1.5 million in collateral management fee income, respectively, due from Saratoga CLO and $3.2 million and $3.1 million in interest income, respectively, due from Saratoga CLO. We did not accrue any amounts related to the incentive management fee as the 12% hurdle rate has not yet been achieved.
At November 30, 2012, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $24.6 million, whereas the net asset value of Saratoga CLO on such date was $28.8 million. The Company does not believe that the net asset value of Saratoga CLO, which is the difference between Saratoga CLO’s assets and liabilities at a given point in time, necessarily equates to the fair value of its investment in the subordinated notes of Saratoga CLO. Specifically, the Company determines the fair value of its investment in the subordinated notes of Saratoga CLO based on the present value of the projected future cash flows of the subordinated notes over the life of Saratoga CLO. At November 30, 2012, Saratoga CLO had investments with a principal balance of $393.4 million and a weighted average spread over LIBOR of 4.2%, and had debt with a principal balance of $366.0 million with a weighted average spread over LIBOR of 1.4%. As a result, Saratoga CLO earns a “spread” between the interest income it receives on its investments and the interest expense it pays on its debt and other operating expenses, which is distributed quarterly to the Company as the holder of its subordinated notes. At November 30, 2012, the total “spread”, or projected future cash flows of the subordinated notes, over the life of Saratoga CLO was $37.2 million, which had a present value of approximately $25.1 million, using a 13% discount rate. At November 30, 2012, the fair value of the subordinated notes, which we based upon the present value of the projected cash flows, was $24.6 million, which was less than the net asset value of Saratoga CLO on such date by approximately $4.2 million.
Below is certain summary financial information from the separate unaudited financial statements of Saratoga CLO as of November 30, 2012 and February 29, 2012 and for the three and nine months ended November 30, 2012 and 2011.
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GSC Investment Corp. CLO 2007
Statements of Assets and Liabilities
Investments
Fair Value Loans
366,614,963
365,780,893
Fair Value Other/Structured finance securities
15,583,573
Total investments at fair value
382,198,536
381,364,466
13,403,783
17,815,082
Receivable from open trades
2,877,531
10,046,640
1,652,532
1,581,438
Deferred bond issuance
2,274,369
2,819,118
402,406,751
413,626,744
Interest payable
707,991
826,741
Payable from open trades
8,823,095
24,857,147
Accrued senior collateral monitoring fee
43,389
45,516
Accrued subordinate collateral monitoring fee
173,557
182,064
Class A notes
296,000,000
Class B notes
22,000,000
Discount on class B notes
(431,922
(477,483
Class C notes
14,000,000
Class D notes
16,000,000
Discount on class D notes
(456,909
(505,106
Class E notes
17,960,044
Discount on class E notes
(1,175,354
(1,299,337
373,643,891
389,589,586
PARTNERS’ CAPITAL
Preference shares principal
Preferred shares
14,577,740
9,478,573
Partners distributions
(26,936,112
(20,540,583
Net income
11,121,232
5,099,168
Total capital
28,762,860
24,037,158
Total liabilities and partners’ capital
19
Statement of Operations
For the three months ended November 30
For the nine months ended November 30
4,843,433
4,938,100
14,699,180
15,158,477
2,718
1,283
13,550
6,976
292,475
89,338
607,648
439,255
5,138,626
5,028,721
15,320,378
15,604,708
Interest expense
1,681,369
1,615,662
5,256,854
4,793,580
46,134
50,075
293,392
307,156
Misc. Fee Expense
15,494
11,757
83,081
158,416
Senior collateral monitoring fee
100,091
100,384
300,104
302,418
Subordinate collateral monitoring fee
400,363
401,536
1,200,415
1,209,673
Trustee expenses
25,778
25,291
75,646
75,374
Amortization expense
253,635
762,489
2,522,864
2,458,340
7,971,981
7,609,106
2,615,762
2,570,381
7,348,397
7,995,602
Net realized gain/(loss) on investments
269,472
106,318
1,681,602
(5,075,060
Net unrealized appreciation/(depreciation) on investments
782,564
6,446,956
2,091,233
(7,191,712
Net gain/(loss) on investments
1,052,036
6,553,274
3,772,835
(12,266,772
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
3,667,798
9,123,655
(4,271,170
20
Issuer_Name
Asset_Name
Asset_Type
Current Rate
Maturity Date
Principal / Number of Shares
Elyria Foundry Company, LLC
Warrants
Equity
0.00
Network Communications, Inc.
Common
169,143
659,658
OLD AII, Inc (fka Aleris International Inc.)
2,624
224,656
128,576
PATS Aircraft, LLC
51,813
282,326
282,329
SuperMedia Inc. (fka Idearc Inc.)
10,821
28,784
5,411
Academy, LTD.
Initial Term Loan (2012)
Loan
4.75
8/3/2018
1,985,000
1,970,290
1,992,444
ACCO Brands Corporation
Term B Loan
4.25
5/1/2019
375,278
371,841
378,561
Acosta, Inc.
Term D Loan
5.00
3/2/2018
4,183,659
4,117,676
4,220,266
Aeroflex Incorporated
Tranche B Term Loan
5.75
5/9/2018
3,345,517
3,332,491
3,339,529
Alere Inc. (fka IM US Holdings, LLC)
Incremental B-1 Term Loan
6/30/2017
1,944,046
1,993,516
Aptalis Pharma, Inc. (fka Axcan Intermediate Holdings Inc.)
Term B-1 Loan
5.50
2/10/2017
1,965,000
1,958,114
1,963,782
Aramark Corporation
LC-2 Facility
3.46
7/26/2016
79,187
79,336
LC-3 Facility
43,961
44,043
U.S. Term B Loan (Extending)
1,204,093
1,206,357
U.S. Term C Loan
3.57
2,545,700
2,550,486
Armstrong World Industries, Inc
Term Loan B-1
4.00
3/10/2018
2,128,332
2,114,455
2,139,315
Ashland Inc.
3.75
8/23/2018
740,000
738,482
745,624
Asurion, LLC (fka Asurion Corporation)
Amortizing Term Loan
7/23/2017
1,000,000
990,707
1,003,750
Term Loan (First Lien)
5/24/2018
5,659,091
5,614,478
5,702,440
Aurora Diagnostics, LLC
6.25
5/26/2016
3,188,889
3,198,996
3,180,917
Autotrader.com, Inc.
Tranche B-1 Term Loan
12/15/2016
3,840,515
3,865,478
Avantor Performance Materials Holdings, Inc.
Term Loan
6/24/2017
4,937,500
4,918,555
4,912,813
AZ Chem US Inc.
7.25
12/22/2017
1,574,545
1,534,359
1,597,676
BakerCorp International, Inc. (f/k/a B-Corp Holdings, Inc.)
6/1/2018
2,585,841
2,585,109
Biomet, Inc.
Dollar Term B-1 Loan
3.96
7/25/2017
1,995,000
2,009,963
Bombardier Recreational Products Inc.
Term B-2 Loan
4.46
6/28/2016
1,990,340
2,005,840
Burlington Coat Factory Warehouse Corporation
2/23/2017
2,989,629
3,020,880
C.H.I. Overhead Doors, Inc. (CHI)
8/17/2017
2,983,844
2,936,520
Camp International Holding Company
Refinanced Term Loan (First Lien)
5.25
5/31/2019
990,243
1,005,000
Capital Automotive L.P.
3/11/2017
2,879,345
2,886,543
2,884,153
Capstone Logistics, LLC
Term Note A
7.50
9/16/2016
2,963,427
2,928,307
2,918,975
Capsugel Holdings US, Inc.
Initial Term Loan (New)
8/1/2018
3,700,642
3,690,746
3,729,507
Celanese US Holdings LLC
Dollar Term C Loan (Extended)
3.11
10/31/2016
2,204,172
2,226,295
2,219,887
Cenveo Corporation
Term B Facility
6.63
12/21/2016
2,443,617
2,427,099
2,449,726
Charter Communications Operating, LLC
Term C Loan
9/6/2016
3,062,577
3,057,871
3,075,103
5/15/2019
1,990,000
1,980,945
2,004,428
CHS/ Community Health Systems, Inc.
Extended Term Loan
3.81
1/25/2017
4,064,516
3,957,287
4,089,431
Cinedigm Digital Funding I, LLC
4/29/2016
1,164,109
1,157,458
Cinemark USA, Inc.
4/30/2016
5,545,125
5,350,619
5,570,521
Contec, LLC
Second Lien Term Notes
10.00
11/2/2016
401,202
2,534,998
2,578,210
Covanta Energy Corporation
3/28/2019
497,500
495,252
497,813
CPI International Acquisition, Inc. (f/k/a Catalyst Holdings, Inc.)
2/13/2017
4,895,268
4,937,063
Crown Castle Operating Company
1/31/2019
1,967,373
1,993,694
CSC Holdings, LLC (fka CSC Holdings Inc. (Cablevision))
Term A-3 Loan
2.46
3/31/2015
1,195,614
1,191,958
1,180,669
Culligan International Company
Dollar Loan (First Lien)
12/19/2017
797,680
731,052
727,883
Dollar Loan (Second Lien)
9.50
6/19/2018
783,162
717,261
593,895
DaVita HealthCare Partners Inc. (fka DaVita Inc.)
4.50
10/20/2016
3,959,698
3,979,496
DCS Business Services, Inc.
3/16/2018
3,980,005
3,927,317
3,920,305
Dean Foods Company
2016 Tranche B Term Loan (extending)
3.21
4/2/2016
3,003,701
2,991,750
Del Monte Foods Company
Initial Term Loan
3/8/2018
1,438,139
1,435,434
1,433,350
Dollar General Corporation
2.96
7/7/2014
5,378,602
5,254,601
5,401,784
DS Waters of America, Inc.
10.50
8/29/2017
2,985,000
2,933,196
3,003,656
DynCorp International Inc.
7/7/2016
626,793
619,258
628,987
Education Management LLC
Tranche C-2 Term Loan
6/1/2016
3,935,720
3,722,533
3,219,930
eInstruction Corporation
7/2/2013
2,997,722
2,931,236
899,317
Electrical Components International, Inc.
Synthetic Revolving Loan
6.75
2/4/2016
117,647
116,524
2/4/2017
1,791,033
1,772,299
Evergreen Acqco 1 LP
New Term Loan
7/9/2019
498,750
493,882
498,905
Federal-Mogul Corporation
2.15
12/29/2014
2,595,849
2,493,239
2,381,692
Tranche C Term Loan
12/28/2015
1,324,413
1,262,570
1,215,149
First Data Corporation
2017 Dollar Term Loan
5.21
3/24/2017
2,111,028
2,022,364
2,066,168
2018 Dollar Term Loan
4.21
3/23/2018
2,290,451
2,213,243
2,180,693
FR Acquisitions Holding Corporation (Luxembourg), S.A.R.L.
Facility B (Dollar)
4.86
12/18/2015
1,295,106
1,292,610
1,281,080
Facility C (Dollar)
5.36
12/20/2016
1,292,160
1,287,556
Freescale Semiconductor, Inc.
12/1/2016
2,534,348
2,444,611
2,451,982
FTD Group, Inc.
6/11/2018
3,715,723
3,682,030
3,738,760
Generac Power Systems, Inc.
5/30/2018
997,500
979,109
1,017,450
General Nutrition Centers, Inc.
Amended Tranche B Term Loan
3,748,295
3,752,981
Goodyear Tire & Rubber Company, The
Loan (Second Lien)
4/30/2019
3,926,815
4,016,680
Grifols Inc.
New U.S. Tranche B Term Loan
6/1/2017
2,975,704
2,960,017
3,005,461
Grosvenor Capital Management Holdings, LLLP
12/5/2016
3,342,748
3,253,094
3,288,429
Hanger Orthopedic Group, Inc.
3,920,667
3,930,935
HCA Inc.
Tranche B-3 Term Loan
5/1/2018
5,734,690
5,426,252
5,734,002
Health Management Associates, Inc.
11/16/2018
2,977,500
2,951,738
3,003,523
HIBU PLC (fka Yell Group PLC)
Facility B1 - YB (USA) LLC (11/2009)
7/31/2014
3,030,606
2,983,167
596,029
HMH Holdings (Delaware) Inc.
Term Loan (Exit Facility)
5/22/2018
995,000
976,550
1,002,463
Hologic, Inc.
Tranche A Term Loan
8/1/2017
2,468,750
2,462,943
2,470,305
Hunter Defense Technologies, Inc.
3.52
8/22/2014
3,679,939
3,642,211
3,201,547
Huntsman International LLC
Extended Term B Loan
2.76
4/19/2017
3,920,000
3,881,526
3,918,589
Infor (US), Inc. ((fka Lawson Software Inc.)
Tranche B-2 Term Loan
4/5/2018
1,975,693
2,012,456
Inventiv Health, Inc. (fka Ventive Health, Inc)
Consolidated Term Loan
6.50
8/4/2016
492,090
465,640
J. Crew Group, Inc.
3/7/2018
985,000
984,448
Kalispel Tribal Economic Authority
2/25/2017
3,675,323
3,623,375
3,601,817
Key Safety Systems, Inc.
2.51
3/8/2014
3,790,786
3,654,834
3,749,732
Kinetic Concepts, Inc.
Dollar Term C-1 Loan
5/4/2018
496,250
479,089
498,731
Kronos Worldwide, Inc.
6/13/2018
1,975,000
1,961,430
1,984,875
MetroPCS Wireless, Inc.
4.07
11/3/2016
2,495,830
2,498,490
2,505,190
Microsemi Corporation
2/2/2018
2,781,389
2,775,257
2,795,991
National CineMedia, LLC
11/26/2019
1,086,207
1,049,619
1,085,305
Newsday, LLC
10/12/2016
2,996,250
2,958,750
Novelis, Inc.
3/10/2017
990,000
969,828
991,228
3,930,000
3,957,969
3,936,131
NPC International, Inc.
12/28/2018
490,833
493,901
NRG Energy, Inc.
7/1/2018
3,925,294
3,983,338
NuSil Technology LLC.
4/7/2017
823,729
OEP Pearl Dutch Acquisition B.V.
Initial BV Term Loan
3/30/2018
149,250
146,575
149,437
On Assignment, Inc.
Initial B Loan
2,745,925
2,728,373
2,759,654
Onex Carestream Finance LP
4,922,804
4,905,385
4,884,357
OpenLink International, Inc.
7.75
10/30/2017
992,500
976,239
P.F. Chang’s China Bistro, Inc. (Wok Acquisition Corp.)
Term Borrowing
6/22/2019
990,534
1,008,700
8.50
10/6/2016
384,131
248,245
345,718
Penn National Gaming, Inc.
Term A Facility
1.72
7/14/2016
2,812,500
2,750,784
2,792,812
7/16/2018
987,500
985,519
990,176
PetCo Animal Supplies, Inc.
New Loan
11/24/2017
1,500,000
1,498,357
1,505,820
Pharmaceutical Product Development, Inc. (Jaguar Holdings, LLC)
12/5/2018
1,959,370
2,012,691
Physician Oncology Services, LP
Delayed Draw Term Loan
1/31/2017
51,020
50,661
48,724
Effective Date Term Loan
419,961
417,003
401,062
Pinnacle Foods Finance LLC
Extended Initial Term Loan
3.71
10/2/2016
5,741,004
5,489,048
5,761,269
Polyone Corporation
12/20/2017
492,069
498,235
Preferred Proppants, LLC
1,952,084
1,826,200
Prestige Brands, Inc.
5.27
734,848
725,056
742,329
Pro Mach, Inc.
7/6/2017
1,956,155
1,941,042
1,957,387
Quintiles Transnational Corp.
6/8/2018
3,918,848
3,956,913
Ranpak Corp.
USD Term Loan (First Lien)
4/20/2017
2,402,108
2,393,280
2,366,077
Rexnord LLC/RBS Global, Inc.
Term B Loan Refinancing
4/1/2018
2,001,952
Reynolds Group Holdings Inc.
U.S. Term Loan
9/28/2018
2,012,280
Rocket Software, Inc.
2/8/2018
1,950,427
1,991,451
Roundy’s Supermarkets, Inc.
2/13/2019
981,722
936,544
Rovi Solutions Corporation / Rovi Guides, Inc.
Tranche A-2 Loan
3/29/2017
1,981,202
1,945,000
Tranche B-2 Loan
3/29/2019
1,492,500
1,485,740
1,466,381
Royal Adhesives and Sealants, LLC
Term A Loan
11/29/2015
4,560,234
4,517,413
4,493,515
RPI Finance Trust
6.75 Year Term Loan(2012)
3.50
5,412,536
5,386,241
5,435,106
Scientific Games International Inc.
6/30/2015
1,983,357
1,969,898
1,980,878
Scitor Corporation
2/15/2017
463,977
462,349
459,917
Scotsman Industries, Inc.
1,700,114
1,696,124
1,702,240
Securus Technologies Holdings, Inc (fka Securus Technologies, Inc.)
Tranche 2 Term Loan (First Lien)
5/31/2017
1,971,927
1,996,229
Sensata Technology BV/Sensata Technology Finance Company, LLC
5/12/2018
2,977,387
2,986,855
Sensus USA Inc. (fka Sensus Metering Systems)
5/9/2017
1,970,000
1,962,687
1,966,316
ServiceMaster Company, The
2,858,551
2,869,200
2,850,061
SI Organization, Inc., The
New Tranche B Term Loan
11/22/2016
3,903,944
3,900,525
Sonneborn, LLC
Initial US Term Loan
845,750
830,589
846,807
Sophia, L.P.
7/19/2018
981,047
968,291
992,329
SRA International Inc.
7/20/2018
3,268,571
3,160,663
3,092,886
SRAM, LLC
4.76
6/7/2018
3,604,195
3,572,993
3,622,216
SS&C Technologies, Inc., /Sunshine Acquisition II, Inc.
Funded Term B-1 Loan
6/7/2019
849,906
841,983
859,110
Funded Term B-2 Loan
87,921
87,102
88,873
SunCoke Energy, Inc.
7/26/2018
4,451,185
4,423,081
4,434,493
SunGard Data Systems Inc (Solar Capital Corp.)
Tranche B U.S. Term Loan
3.86
2/28/2016
4,253,748
4,178,443
4,251,111
2/28/2017
497,687
492,723
498,001
11.00
12/31/2015
296,243
288,174
187,818
Syniverse Holdings, Inc.
4/23/2019
494,178
501,244
Taminco Global Chemical Corporation
Tranche B-1 Dollar Term Loan
2/15/2019
1,483,406
1,502,455
Team Health, Inc.
6/29/2018
4,443,750
4,425,954
4,399,313
Texas Competitive Electric Holdings Company, LLC (TXU)
2014 Term Loan (Non-Extending)
3.74
10/10/2014
5,580,862
5,519,373
3,770,207
Tomkins, LLC / Tomkins, Inc. (f/k/a Pinafore, LLC / Pinafore, Inc.)
9/29/2016
2,438,057
2,443,634
2,446,688
TransDigm Inc.
2/14/2017
3,958,561
3,969,794
3,971,545
995,136
1,003,960
TransFirst Holdings, Inc.
6/16/2014
2,368,750
2,344,405
2,346,247
Tricorbraun Inc. (fka Kranson Industries, Inc.)
5/3/2018
1,985,941
1,997,494
Truven Health Analytics Inc. (fka Thomson Reuters (Healthcare) Inc.)
6/6/2019
489,016
Tube City IMS Corporation
3/20/2019
985,990
1,003,706
U.S. Security Associates Holdings, Inc.
6.00
7/28/2017
162,185
160,924
162,590
Term Loan B
124,060
123,527
124,371
828,632
822,188
830,703
U.S. Silica Company
6/8/2017
1,967,550
1,977,469
U.S. Xpress Enterprises, Inc.
11/13/2016
United Surgical Partners International, Inc.
4/3/2019
2,487,500
2,453,627
2,493,719
Univar Inc.
3,934,937
3,933,968
3,900,113
UPC Financing Partnership
Facility AF
1/31/2021
970,050
998,330
USI Holdings Corporation
2.71
5/5/2014
4,744,655
4,681,546
4,725,391
Valeant Pharmaceuticals International, Inc.
Series D Tranche B Term Loan
2,972,883
2,994,045
Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)
3/27/2019
1,066,071
1,061,243
Verint Systems Inc.
Term Loan 2011
10/27/2017
1,962,531
1,979,023
Vertafore, Inc.
7/29/2016
2,992,390
2,996,879
Visant Corporation (fka Jostens)
Tranche B Term Loan (2011)
12/22/2016
3,767,519
3,405,837
Weight Watchers International, Inc.
2.63
6/30/2016
2,707,453
2,671,765
2,699,547
Wendy’s International, Inc
990,653
1,007,320
Wolverine World Wide, Inc.
7/31/2019
928,571
919,286
933,799
Yankee Candle Company, Inc., The
4/2/2019
2,464,981
2,507,922
ALM 2010-1A
Floating - 05/2020 - B - 00162VAE5
ABS
2.61
5/20/2020
3,742,563
3,657,600
BABSN 2007-1A
Floating - 01/2021 - D1 - 05617AAA9
1/18/2021
1,251,353
1,050,000
GALE 2007-3A
Floating - 04/2021 - E - 363205AA3
4/19/2021
3,367,988
2,800,000
KATO 2006-9A
Floating - 01/2019 - B2L - 486010AA9
3.82
1/25/2019
5,000,000
4,311,758
STCLO 2007-6A
Floating - 04/2021 - D- 86176YAG7
3.93
4/17/2021
4,025,572
388,766,439
22
2,000
OLD All, Inc (fka Aleris International Inc.)
1,986,129
1,999,540
3/1/2018
4,243,447
4,177,485
4,210,561
Advanced Lighting Technologies, Inc.
Deferred Draw Term Loan (First Lien)
3.00
6/1/2013
251,309
241,553
240,628
4,582,873
4,478,009
4,388,101
3,814,483
3,797,573
3,715,459
Aerostructures Acquisition LLC
3/1/2013
554,722
543,949
542,240
1,951,950
1,992,500
1,980,000
1,971,816
1,963,170
996,964
994,651
1,000,872
5,608,344
5,635,040
508,611
499,288
3,869,758
3,868,790
4,975,000
4,952,760
4,875,500
1,941,354
2,014,720
495,278
496,754
Bass Pro Group, LLC
6/13/2017
2,958,694
2,977,000
BJ’s Wholesale Club, Inc.
Initial Loan (First Lien) Retired 03/14/2012
7.00
1,901,076
2,013,015
3,079,513
3,022,863
3,035,876
2,991,353
2,948,863
2,946,483
3,990,000
3,979,634
4,012,783
3.33
3,464,824
3,506,288
3,478,198
2,737,105
2,715,168
2,719,150
3.83
3,979,695
3,972,997
3,949,291
4.08
4,170,088
4,042,207
4,120,589
1,482,007
1,471,669
1,468,121
3.63
5,587,889
5,348,623
5,576,546
Consolidated Container Company LLC
Loan (First Lien)
2.50
3/28/2014
5,195,532
4,906,062
5,052,655
7/28/2014
2,644,318
2,613,795
1,057,727
Funded Letter of Credit
1.98
2/10/2014
877,007
860,931
871,525
1.79
1,698,170
1,666,874
1,687,557
4,929,526
4,912,875
CRC Health Corporation
5.08
11/16/2015
1,991,877
1,896,087
1,782,730
1,980,071
1,990,540
CSC Holdings, LLC (fka CSC Holdings Inc (Cablevision))
2.24
1,360,526
1,355,021
1,333,316
Dollar Loan
11/24/2012
2,393,216
2,360,219
1,714,141
DaVita Inc.
3,989,924
3,999,061
1,489,291
1,464,098
3.14
5,196,110
5,382,905
2,446,849
2,456,712
732,056
721,414
729,538
4.63
3,967,860
3,706,684
3,712,448
6.51
3,005,574
2,923,634
2,705,017
116,257
104,118
1,804,706
1,782,426
1,597,165
2.20
2,616,289
2,475,132
2,500,204
2.19
1,334,841
1,257,114
1,275,614
Fidelity National Information Services, Inc.
7/18/2016
990,338
1,004,450
4.24
2,202,287
2,041,845
Non Extending B-1 Term Loan
2.99
9/24/2014
1,971,336
1,933,908
1,890,472
Non Extending B-2 Term Loan
990,052
971,955
949,440
FleetPride Corporation
12/6/2017
980,767
1,291,993
1,221,454
5.58
1,291,613
1,227,929
4.52
1,534,348
1,468,484
1,496,711
23
Fresenius Medical Care AG & Co., KGaA/Fresenius Medical Care Holdings, Inc.
1.95
3/31/2013
4,224,718
4,206,870
4,209,889
3,982,494
3,943,002
3,902,844
Generac Power System, Inc.
2/9/2019
497,509
497,855
3,750,000
3,621,437
3,738,900
1.75
4/30/2014
5,700,000
5,339,456
5,607,375
Graphic Packaging International, Inc.
Term B Loan Retired 03/16/2012
2.34
5/16/2014
3,045,465
2,910,836
3,041,993
499,530
4.31
3,430,885
3,321,594
3,276,495
4.01
3,960,000
3,972,323
3,905,550
3.49
5,383,348
5,638,634
2,970,763
2,981,640
Hilsinger Company, The
5.26
12/31/2013
1,218,491
1,203,274
1,072,272
4,459,263
4,388,148
3,879,559
3,955,000
3,923,200
Hygenic Corporation, The
4/30/2013
1,563,048
1,536,828
1,438,004
Infor Enterprise Solutions Holdings, Inc. (fka Magellan Holdings, Inc.)(Infor Global Solutions)
Extended Delayed Draw Term Loan (First Lien)
7/28/2015
1,314,907
1,229,818
1,276,828
Extended Initial U.S. Term Loan (First Lien)
2,520,239
2,356,915
2,447,253
494,587
475,422
970,963
3,859,091
3,794,849
3,627,546
2.59
3,821,774
3,604,295
3,667,718
483,349
508,125
Leslie’s Poolmart, Inc.
11/21/2016
3,965,615
3,920,400
Metal Services, LLC
9.75
9/29/2017
132,353
129,737
132,022
1,367,647
1,340,612
1,364,228
2,992,500
2,997,750
2.05
2/13/2015
2,655,172
2,572,741
2,608,707
Nielsen Finance LLC
Class A Dollar Term Loan
2.26
8/9/2013
720,738
710,645
717,134
973,592
993,141
3,993,151
3,939,487
Novell, Inc. (fka Attachmate Corporation, NetIQ Corporation)
4/27/2017
4,913,011
4,873,313
490,246
502,970
3,951,892
3,961,334
NuSil Technology LLC
905,085
902,071
4,961,770
4,941,092
4,707,479
981,105
431,472
248,964
388,325
Pelican Products, Inc.
3/7/2017
2,673,704
2,653,651
2,925,000
2,847,453
2,837,250
992,736
996,930
1,498,125
1,493,115
1,970,941
2,017,860
Pharmaceutical Research Associates Group B.V.
Dutch Dollar Term Loan
12/15/2014
799,151
753,650
775,176
50,596
49,235
416,468
405,262
2.84
4/2/2014
4,796,078
4,694,850
4,766,054
495,160
500,730
PRA International
2,512,401
2,439,376
2,437,029
1,960,652
Pre-Paid Legal Services, Inc.
12/31/2016
2,695,122
2,659,371
2,607,530
985,047
1,003,060
1,972,106
1,930,300
3,944,328
3,953,692
RailAmerica, Inc.
Initial Loan
3/1/2019
2,744,392
2,732,572
2,716,948
Tranche B-2 Term B Loan Retired 03/15/2012
7/19/2013
1,607,683
1,566,832
1,590,609
2/9/2018
1,963,643
1,977,880
8/9/2018
1,973,590
1,955,434
1,992,398
1,960,110
1,997,500
985,035
1,000,780
4,785,882
4,729,636
4,715,862
6.75 Year Term Loan
5,472,500
5,447,342
5,462,868
Safety-Kleen Systems, Inc.
2/21/2017
247,501
Savers, Inc.
3/4/2017
464,891
464,426
476,818
474,846
458,937
1,873,081
1,867,006
1,863,716
Seminole Tribe of Florida
Term B-1 Delay Draw Loan
2.13
3/5/2014
616,208
605,662
607,476
Term B-2 Delay Draw Loan
2,230,224
2,192,054
2,198,622
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Term B-3 Delay Draw Loan
1,108,287
1,082,950
1,092,583
2,994,150
1,976,380
1,981,030
3,928,772
3,794,987
985,259
1,010,630
6.52
3,725,714
3,582,427
3,665,171
3,886,998
3,850,268
3,882,139
4,484,984
4,452,979
4,473,771
Incremental Term B Loan
2/28/2014
356,996
355,911
Tranche A U.S. Term Loan
2.00
140,691
138,222
140,363
4.06
3,253,748
3,173,463
3,246,265
Sunquest Information Systems, Inc. (Misys Hospital Systems, Inc.)
12/16/2016
980,580
986,714
326,109
317,228
164,685
Dollar Term Loan
490,024
501,875
TDG Holding Company (fka Dwyer Acquisition, Inc.)
12/23/2015
3,463,273
3,422,302
3,411,324
4,477,500
4,457,147
4,331,981
3.76
5,494,432
3,406,670
3,988,779
4,002,125
3,985,269
2,387,500
2,350,983
2,282,044
163,000
161,527
161,778
125,000
124,375
124,688
834,908
827,364
832,820
1,981,242
1,972,588
3,964,975
3,963,846
3,928,021
Facility AB
12/31/2017
971,447
998,250
2.75
4,782,211
4,685,075
4,678,581
995,002
996,880
Term B-1 Loan (First Lien)
3,979,950
3,988,810
3,982,776
1,976,319
1,978,807
3,611,430
1/26/2014
1,229,200
1,220,261
1,221,518
2.88
2,728,226
2,684,697
2,714,585
Wendy’s/Arby’s Restaurants, LLC
5/24/2017
1,122,902
1,118,702
1,123,745
Wil Research Laboratories, LLC
9/26/2013
1,808,039
1,726,498
1,663,396
WireCo WorldGroup Inc.
1,992,943
1,967,101
1,953,084
2/6/2014
2,537,336
2,419,753
2,523,428
Yell Group Plc
Facility B1—YB (USA) LLC (11/2009)
3.99
3,139,856
3,090,757
961,141
Floating—05/2020—B—00162VAE5
Other/Structured Finance Securities
2.78
3,716,602
Floating—01/2021—D1—05617AAA9
1,236,977
Floating—04/2021—E—363205AA3
Other/Structured
3,311,208
Floating—01/2019—B2L—486010AA9
4,227,490
Floating—04/2021—D—86176YAG7
4.17
4,077,701
390,023,603
Note 5. Agreements
On July 30, 2010, the Company entered into an investment advisory and management agreement (the “Management Agreement”) with our Manager. The initial term of the Management Agreement is two years, with automatic, one-year renewals at the end of each year subject to certain approvals by our board of directors and/or our stockholders. On July 9, 2012, our board of directors approved the renewal of the Management Agreement for an additional one-year term. Pursuant to the Management Agreement, our Manager implements our business strategy on a day-to-day basis and performs certain services for us, subject to oversight by our board of directors. Our Manager is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties. Under the Management Agreement, we have agreed to pay our Manager a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.
The base management fee of 1.75% is calculated based on the average value of our gross assets (other than cash or cash equivalents, but including assets purchased with borrowed funds) at the end of the two most recently completed fiscal quarters, and appropriately adjusted for any share issuances or repurchases during the applicable fiscal quarter.
The incentive fee consists of the following two parts:
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The first, payable quarterly in arrears, equals 20% of our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding quarter, that exceeds a 1.875% quarterly (7.5% annualized) hurdle rate measured as of the end of each fiscal quarter, subject to a “catch-up” provision. Under this provision, in any fiscal quarter, our Manager receives no incentive fee unless our pre-incentive fee net investment income exceeds the hurdle rate of 1.875%. Our Manager will receive 100% of pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.344% in any fiscal quarter (9.376% annualized); and 20% of the amount of the our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter (9.376% annualized).
The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Management Agreement) and equals 20% of our “incentive fee capital gains,” which equals our realized capital gains on a cumulative basis from August 31, 2010 through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis from August 31, 2010, less the aggregate amount of any previously paid capital gain incentive fee. Importantly, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from August 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and our Manager will be entitled to 20% of incentive fee capital gains that arise after August 31, 2010. In addition, for the purpose of the “incentive fee capital gains” calculations, the cost basis for computing realized gains and losses on investments held by us as of August 31, 2010 will equal the fair value of such investments as of such date.
For the three months ended November 30, 2012 and 2011, we accrued $0.5 million and $0.4 million in base management fees, respectively. For the three months ended November 30, 2012 and 2011, we incurred $0.1 million and $0.3 million in incentive fees related to pre-incentive fee net investment income, respectively. For the three months ended November 30, 2012, we reduced the incentive fees related to capital gains by $0.5 million. For the three months ended November 30, 2011, we accrued $0.9 million in incentive fees related to capital gains. For the nine months ended November 30, 2012 and 2011, we accrued $1.5 million and $1.2 million in base management fees, respectively. For the nine months ended November 30, 2012 and 2011, we incurred $0.4 million and $0.3 million in incentive fees related to pre-incentive fee net investment income, respectively. For the nine months ended November 30, 2012 and 2011, we accrued $0.5 million and $0.5 million in incentive fees related to capital gains, respectively. The accruals related to the capital gains incentive fees were calculated using both realized and unrealized capital gains for the period. The actual incentive fee related to capital gains will be determined and payable in arrears at the end of the fiscal year and will include only realized capital gains for the period. As of November 30, 2012, $0.5 million of base management fees and $2.8 million of incentive fees were accrued and included in management and incentive fees payable in the accompanying consolidated statement of assets and liabilities.
On July 30, 2010, the Company entered into a separate administration agreement (the “Administration Agreement”) with our Manager, pursuant to which our Manager, as our administrator, has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide managerial assistance on our behalf to those portfolio companies to which we are required to provide such assistance. The initial term of the Administration Agreement is two years, with automatic, one-year renewals at the end of each year subject to certain approvals by our board of directors and/or our stockholders. The amount of expenses payable or reimbursable thereunder by the Company is capped at $1 million for the initial two year term of the Administration Agreement. On July 9, 2012, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to maintain the cap on the payment or reimbursement of expenses by the Company thereunder to $1 million for the additional one-year term.
For the three months ended November 30, 2012 and 2011, we recognized $0.3 million and $0.3 million in administrator expenses for the periods, pertaining to bookkeeping, record keeping and other administrative services provided to us in addition to our allocable portion of rent and other overhead related expenses. For the nine months ended November 30, 2012 and 2011, we recognized $0.8 million and $0.7 million in administrator expenses for the periods, pertaining to bookkeeping, record keeping and other administrative services provided to us in addition to our allocable portion of rent and other overhead related expenses. As of November 30, 2012, $0.1 million of administrator expenses were accrued and included in due to manager in the accompanying consolidated statement of assets and liabilities.
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Note 6. Borrowings
Credit Facility
As a BDC, we are only allowed to employ leverage to the extent that our asset coverage, as defined in the 1940 Act, equals at least 200% after giving effect to such leverage. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing.
On April 11, 2007, we entered into a $100.0 million revolving securitized credit facility (the “Revolving Facility”). On May 1, 2007, we entered into a $25.7 million term securitized credit facility (the “Term Facility” and, together with the Revolving Facility, the “Facilities”), which was fully drawn at closing. In December 2007, we consolidated the Facilities by using a draw under the Revolving Facility to repay the Term Facility. In response to the market wide decline in financial asset prices, which negatively affected the value of our portfolio, we terminated the revolving period of the Revolving Facility effective January 14, 2009 and commenced a two-year amortization period during which all principal proceeds from the collateral was used to repay outstanding borrowings. A significant percentage of our total assets had been pledged under the Revolving Facility to secure our obligations thereunder. Under the Revolving Facility, funds were borrowed from or through certain lenders and interest was payable monthly at the greater of the commercial paper rate and our lender’s prime rate plus 4.00% plus a default rate of 2.00% or, if the commercial paper market was unavailable, the greater of the prevailing LIBOR rates and our lender’s prime rate plus 6.00% plus a default rate of 3.00%.
In March 2009, we amended the Revolving Facility to increase the portion of the portfolio that could be invested in “CCC” rated investments in return for an increased interest rate and expedited amortization. As a result of these transactions, we expected to have additional cushion under our borrowing base under the Revolving Facility that would allow us to better manage our capital in times of declining asset prices and market dislocation.
On July 30, 2009, we exceeded the permissible borrowing limit under the Revolving Facility for 30 consecutive days, resulting in an event of default under the Revolving Facility. As a result of this event of default, our lender had the right to accelerate repayment of the outstanding indebtedness under the Revolving Facility and to foreclose and liquidate the collateral pledged thereunder. Acceleration of the outstanding indebtedness and/or liquidation of the collateral could have had a material adverse effect on our liquidity, financial condition and operations.
On July 30, 2010, we used the net proceeds from (i) the stock purchase transaction and (ii) a portion of the funds available to us under a $40.0 million senior secured revolving credit facility (the “Replacement Facility”) with Madison Capital Funding LLC, in each case, described in “Note 12. Recapitalization Transaction” below, to pay the full amount of principal and accrued interest, including default interest, outstanding under the Revolving Facility. As a result, the Revolving Facility was terminated in connection therewith. Substantially all of our total assets have been pledged under the Replacement Facility to secure our obligations thereunder.
On February 24, 2012, we amended our senior secured revolving credit facility with Madison Capital Funding LLC to, among other things:
· expand the borrowing capacity under the credit facility from $40 million to $45 million;
· extend the period during which we may make and repay borrowings under the credit facility from July 30, 2013 to February 24, 2015 (the “Revolving Period”). The Revolving Period may end upon the occurrence of an event of default, by action of the lenders or automatically. All borrowings and other amounts payable under the credit facility are due and payable five years after the end of the Revolving Period; and
· remove the condition that we may not acquire additional loan assets without the prior written consent of Madison Capital Funding LLC.
As of November 30, 2012, there was $14.9 million outstanding under the Replacement Facility and the Company was in compliance with all of the limitations and requirements of the Replacement Facility. The carrying amount of the amount outstanding under the Replacement Facility approximates its fair value. $2.8 million of financing costs related to the Replacement Facility have been capitalized and are being amortized over the term of the facility. For the three months ended November 30, 2012 and 2011, we recorded $0.4 million and $0.1 million of interest expense related to the Replacement Facility, respectively. For the three months ended November 30, 2012 and 2011, we recorded $0.1 million and $0.2 million of amortization of deferred financing costs related to the Replacement Facility, respectively. The interest rates during the nine months ended November 30, 2012 and 2011 on the outstanding borrowings of the Replacement Facility were 7.50% and
27
7.50%, respectively. For the nine months ended November 30, 2012 and 2011, we recorded $1.5 million and $0.5 million of interest expense related to the Replacement Facility, respectively. For the nine months ended November 30, 2012 and 2011, we recorded $0.3 million and $0.5 million of amortization of deferred financing costs related to the Replacement Facility, respectively.
The Replacement Facility contains limitations as to how borrowed funds may be used, such as restrictions on industry concentrations, asset size, weighted average life, currency denomination and collateral interests. The Replacement Facility also includes certain requirements relating to portfolio performance, the violation of which could result in the limit of further advances and, in some cases, result in an event of default, allowing the lenders to accelerate repayment of amounts owed thereunder. The Replacement Facility has an eight year term, consisting of a three year period (the “Revolving Period”), under which the Company may make and repay borrowings, and a final maturity five years from the end of the Revolving Period. Availability on the Replacement Facility will be subject to a borrowing base calculation, based on, among other things, applicable advance rates (which vary from 50% to 75% of par or fair value depending on the type of loan asset) and the value of certain “eligible” loan assets included as part of the Borrowing Base. Funds may be borrowed at the greater of the prevailing LIBOR rate and 2.00%, plus an applicable margin of 5.50%. At the Company’s option, funds may be borrowed based on an alternative base rate, which in no event will be less than 3.00%, and the applicable margin over such alternative base rate is 4.50%. In addition, the Company will pay the lenders a commitment fee of 0.75% per year on the unused amount of the Replacement Facility for the duration of the Revolving Period.
Our borrowing base under the Replacement Facility was $27.7 million at November 30, 2012. For purposes of determining the borrowing base, most assets are assigned the values set forth in our most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q filed with the SEC. Accordingly, the November 30, 2012 borrowing base relies upon the valuations set forth in the Quarterly Report on Form 10-Q for the period ended August 31, 2012. The valuations presented in this Quarterly Report on Form 10-Q will not be incorporated into the borrowing base until after this Quarterly Report on Form 10-Q is filed with the SEC.
SBA Debentures
SBIC LP is able to borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid in and is subject to customary regulatory requirements including but not limited to an examination by the SBA. As of November 30, 2012, we have funded SBIC LP with $25.0 million of equity capital, and have $4.0 million of SBA-guaranteed debentures outstanding. SBA debentures are non-recourse to us, have a 10-year maturity, and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-year U.S. Treasury Notes. SBA current regulations limit the amount that SBIC LP may borrow to a maximum of $150.0 million, which is up to twice its potential regulatory capital.
SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18 million and have average annual fully taxed net income not exceeding $6 million for the two most recent fiscal years. In addition, an SBIC must devote 25% of its investment activity to ‘‘smaller’’ concerns as defined by the SBA. A smaller concern is one that has a tangible net worth not exceeding $6 million and has average annual fully taxed net income not exceeding $2 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services.
SBIC LP is subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that SBIC LP will receive SBA guaranteed debenture funding, which is dependent upon SBIC LP continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to SBIC LP’s assets over our stockholders in the event we liquidate SBIC LP or the SBA exercises its remedies under the SBA-guaranteed debentures issued by SBIC LP upon an event of default.
The Company received exemptive relief from the Securities and Exchange Commission to permit it to exclude the debt of SBIC LP guaranteed by the SBA from the definition of senior securities in the 200% asset coverage test under the 1940 Act. This allows the Company increased flexibility under the 200% asset coverage test by permitting it to borrow up to $150 million more than it would otherwise be able to absent the receipt of this exemptive relief.
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As of November 30, 2012, there was $4.0 million outstanding of SBA debentures. The carrying amount of the amount outstanding of SBA debentures approximates its fair value. $0.6 million of financing costs related to the SBA debentures have been capitalized and are being amortized over the term of the commitment and drawdown. For the three months ended November 30, 2012, we recorded $0.001 million of interest expense related to the SBA debentures. For the three months ended November 30, 2012, we recorded $0.03 million of amortization of deferred financing costs related to the SBA debentures. The interest rates during the nine months ended November 30, 2012 on the outstanding borrowings of the SBA debentures was 1.47%. For the nine months ended November 30, 2012, we recorded $0.001 million of interest expense related to the SBA debentures. For the nine months ended November 30, 2012, we recorded $0.04 million of amortization of deferred financing costs related to the SBA debentures. There were no outstanding SBA debentures at November 30, 2011.
Note 7. Directors Fees
The independent directors receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the Audit Committee receives an annual fee of $5,000 and the chairman of each other committee receives an annual fee of $2,000 for their additional services in these capacities. In addition, we have purchased directors’ and officers’ liability insurance on behalf of our directors and officers. Independent directors have the option to receive their directors’ fees in the form of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. No compensation is paid to directors who are “interested persons” of the Company (as such term is defined in the 1940 Act). For the three months ended November 30, 2012 and 2011, we accrued $0.05 million and $0.05 million for directors’ fees expense, respectively. For the nine months ended November 30, 2012 and 2011, we accrued $0.2 million and $0.2 million for directors’ fees expense, respectively. As of November 30, 2012, $0.05 million in directors’ fees expense were unpaid and included in accounts payable and accrued expenses in the consolidated statements of assets and liabilities. As of November 30, 2012, we had not issued any common stock to our directors as compensation for their services.
Note 8. Stockholders’ Equity
On May 16, 2006, GSC Group, Inc. (“GSC Group”) capitalized the LLC, by contributing $1,000 in exchange for 6.7 shares, constituting all of the issued and outstanding shares of the LLC.
On March 20, 2007, the Company issued 95,995.5 and 8,136.2 shares of common stock, priced at $150.00 per share, to GSC Group and certain individual employees of GSC Group, respectively, in exchange for the general partnership interest and a limited partnership interest in GSC Partners CDO III GP, LP, collectively valued at $15.6 million. At this time, the 6.7 shares owned by GSC Group in the LLC were exchanged for 6.7 shares of the Company.
On March 28, 2007, the Company completed its IPO of 725,000 shares of common stock, priced at $150.00 per share, before underwriting discounts and commissions. Total proceeds received from the IPO, net of $7.1 million in underwriter’s discount and commissions, and $1.0 million in offering costs, were $100.7 million.
On November 13, 2009, the Company declared a dividend of $18.25 per share payable on December 31, 2009. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $2.1 million or $2.50 per share. Based on shareholder elections, the dividend consisted of $2.1 million in cash and 864,872.5 of newly issued shares of common stock.
On July 30, 2010, our Manager and its affiliates purchased 986,842 shares of common stock at $15.20 per share. Total proceeds received from this sale were $15.0 million. See “Note 12. Recapitalization Transaction.”
On August 12, 2010, the Company effected a one-for-ten reverse stock split of our outstanding common stock. As a result of the reverse stock split, every ten shares of our common stock were converted into one share of our common stock. Any fractional shares received as a result of the reverse stock split were redeemed for cash. The total cash payment in lieu of shares was $230. Immediately after the reverse stock split, we had 2,680,842 shares of our common stock outstanding.
On November 12, 2010, the Company declared a dividend of $4.40 per share payable on December 29, 2010. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $1.2
29
million or $0.44 per share. Based on shareholder elections, the dividend consisted of approximately $1.2 million in cash and 596,235 shares of common stock.
On November 15, 2011, the Company declared a dividend of $3.00 per share payable on December 30, 2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.0 million or $0.60 per share. Based on shareholder elections, the dividend consisted of approximately $2.0 million in cash and 599,584 shares of common stock.
On November 9, 2012, the Company declared a dividend of $4.25 per share payable on December 31, 2012. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $3.3 million or $0.85 per share. Based on shareholder elections, the dividend consisted of approximately $3.3 million in cash and 853,455 shares of common stock.
Note 9. Earnings Per Share
In accordance with the provisions of FASB ASC 260, “Earnings per Share” (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.
The following information sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three and nine months ended November 30, 2012 and 2011 (dollars in thousands except share and per share amounts):
For the three months ended
For the nine months ended
November 30, 2011
Basic and diluted
746
6,213
8,807
10,195
Weighted average common shares outstanding
Earnings per common share-basic and diluted
Note 10. Dividend
On November 9, 2012, the Company declared a dividend of $4.25 per share payable on December 31, 2012. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $3.3 million or $0.85 per share.
Based on shareholder elections, the dividend consisted of approximately $3.3 million in cash and 853,455 shares of common stock, or 22% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.444 per share, which equaled the volume weighted average trading price per share of the common stock on December 14, 17, 19, 2012. The consolidated financial statements for the period ended November 30, 2012 have been retroactively adjusted to reflect the increase in common stock as a result of the dividend in accordance with the provisions of ASC 505-20-S50 regarding disclosure of a capital structure change after the interim balance sheet but before the release of the financial statements.
On November 15, 2011, the Company declared a dividend of $3.00 per share payable on December 30, 2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.0 million or $0.60 per share.
Based on shareholder elections, the dividend consisted of approximately $2.0 million in cash and 599,584 shares of common stock, or 18% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be
30
received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.117 per share, which equaled the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2011. The consolidated financial statements for the period ended November 30, 2011 have been retroactively adjusted to reflect the increase in common stock as a result of the dividend in accordance with the provisions of ASC 505-20-S50 regarding disclosure of a capital structure change after the interim balance sheet but before the release of the financial statements.
The following tables summarize dividends declared during the nine months ended November 30, 2012 and November 30, 2011 (dollars in thousands except per share amounts):
Amount Per
Date Declared
Record Date
Payment Date
Share *
Total Amount
November 9, 2012
November 20, 2012
December 31, 2012
16,476
Total dividends declared
November 15, 2011
November 25, 2011
December 30, 2011
9,831
* Amount per share is calculated based on the number of shares outstanding at the date of declaration.
Note 11. Financial Highlights
The following is a schedule of financial highlights for the nine months ended November 30, 2012 and 2011:
Per share data:
Net asset value at beginning of period
26.26
Net investment income(1)
1.30
1.25
Net realized and unrealized gains and losses on investments and derivatives
0.95
1.84
3.09
Distributions declared from net investment income
(4.25
(3.00
Other (4)
(1.37
(2.03
Net asset value at end of period
Shares outstanding at end of period
Per share market value at end of period
15.70
12.35
Total return based on market value(2)
26.07
(25.80
)%
Total return based on net asset value(3)
10.43
13.80
Ratio/Supplemental data:
Ratio of net investment income to average net assets(6)
6.04
Ratio of operating expenses to average net assets(6)
5.29
6.03
Ratio of incentive management fees to average net assets(6)
1.16
1.23
Ratio of credit facility related expenses to average net assets(6)
2.36
1.45
Ratio of total expenses to average net assets(6)
8.81
8.71
Portfolio turnover rate(5)
14.64
32.69
31
(1) Net investment income per share is calculated using the weighted average shares outstanding during the period.
(2) Total investment return is calculated assuming a purchase of common shares at the current market value on the first day and a sale at the current market value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions. Total investment returns covering less than a full period are not annualized.
(3) Total investment return is calculated assuming a purchase of common shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions.
(4) Represents the dilutive effect of issuing common stock below net asset value per share during the period.
(5) Portfolio turnover rate is calculated using the lesser of year-to-date sales excluding paydowns or year-to-date purchases over the average of the invested assets at fair value. Not annualized.
(6) Ratios are annualized.
Note 12. Recapitalization Transaction
In July 2010, we consummated a recapitalization transaction that was necessitated by the fact that we had exceeded permissible borrowing limits under the Revolving Facility in July 2009, which resulted in an event of default under the Revolving Facility. As a result of the event of default under the Revolving Facility, the lender had the right to accelerate repayment of the outstanding indebtedness under the Revolving Facility and to foreclose and liquidate the collateral pledged thereunder. We engaged the investment banking firm of Stifel, Nicolaus & Company to evaluate strategic transaction opportunities and consider alternatives for us in December 2008. On April 14, 2010, we entered into a stock purchase agreement with our Manager and certain of its affiliates and an assignment, assumption and novation agreement with our Manager, pursuant to which we assumed certain rights and obligations of our Manager under a debt commitment letter our Manager received from Madison Capital Funding LLC, indicating Madison Capital Funding’s willingness to provide us with the Replacement Facility, subject to the satisfaction of certain terms and conditions. In addition, we and GSCP (NJ), L.P., our then external investment adviser, entered into a termination and release agreement, to be effective as of the closing of the transaction contemplated by the stock purchase agreement, pursuant to which GSCP (NJ), L.P., among other things, agreed to waive any and all accrued and unpaid deferred incentive management fees up to and as of the closing of the transaction contemplated by the stock purchase agreement but continued to be entitled to receive the base management fees earned through the date of the closing of the transaction contemplated by the stock purchase agreement.
On July 30, 2010, the transactions contemplated by the stock purchase agreement with our Manager and certain of its affiliates was completed, and included the following actions:
· the private sale of shares of our common stock for $15 million in aggregate purchase price to our Manager and certain of its affiliates;
· the closing of the $40 million Replacement Facility with Madison Capital Funding;
· the execution of a registration rights agreement with the investors in the private sale transaction, pursuant to which we agreed to file a registration statement with the SEC to register for resale the shares of our common stock sold in the private sale transaction;
· the execution of a trademark license agreement with our Manager pursuant to which our Manager granted us a non-exclusive, royalty-free license to use the “Saratoga” name, for so long as our Manager or one of its affiliates remains our investment adviser;
· replacing GSCP (NJ), L.P. as our investment adviser and administrator with our Manager by executing an investment advisory and management agreement, which was approved by our stockholders, and an administration agreement with our Manager;
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· the resignations of Robert F. Cummings, Jr. and Richard M. Hayden, both of whom are affiliates of GSCP (NJ) L.P., as members of the board of directors and the election of Christian L. Oberbeck and Richard A. Petrocelli, both of whom are affiliates of our Manager, as members of the board of directors;
· the resignation of all of our then existing executive officers and the appointment by our board of directors of Mr. Oberbeck as our chief executive officer and president and Mr. Petrocelli as our chief financial officer, secretary and chief compliance officer; and
· our name change from “GSC Investment Corp.” to “Saratoga Investment Corp.”
We used the net proceeds from the private sale transaction and a portion of the funds available to us under the Replacement Facility to pay the full amount of principal and accrued interest, including default interest, outstanding under Revolving Facility. The Revolving Facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding thereunder on July 30, 2010.
Note 13. Subsequent Events
Management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the consolidated financial statements as of and for the quarter ended November 30, 2012.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, the following discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed in Item 1A in our Annual Report on Form 10-K for the fiscal year ended February 29, 2012.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.
The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties, including statements as to:
· our future operating results;
· our business prospects and the prospects of our portfolio companies;
· the impact of investments that we expect to make;
· our contractual arrangements and relationships with third parties;
· the dependence of our future success on the general economy and its impact on the industries in which we invest;
· the ability of our portfolio companies to achieve their objectives;
· our expected financings and investments;
· our regulatory structure and tax treatment, including our ability to operate as a business development company, a regulated investment company and a small business investment company;
· the adequacy of our cash resources and working capital;
· the timing of cash flows, if any, from the operations of our portfolio companies; and
· the ability of our investment adviser to locate suitable investments for us and to monitor and effectively administer our investments.
You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no
obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.
OVERVIEW
We are a Maryland corporation that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments. We invest primarily in leveraged loans and mezzanine debt issued by private U.S. middle market companies, both through direct lending and through participation in loan syndicates. We may also invest up to 30% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, which may include securities of companies in bankruptcy, foreign debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds. We have elected and qualified to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
We commenced operations, at the time as GSC Investment Corp., on March 23, 2007, and completed our initial public offering on March 28, 2007. Prior to July 30, 2010, we were externally managed and advised by GSCP (NJ), L.P., an entity affiliated with GSC Group, Inc. In connection with the consummation of the recapitalization transaction described in “Note 12. Recapitalization Transaction” on July 30, 2010, we engaged Saratoga Investment Advisors, LLC (“SIA”) to replace GSCP (NJ), L.P. as our investment adviser and changed our name to Saratoga Investment Corp.
Critical Accounting Policies
Basis of Presentation
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make certain estimates and assumptions affecting amounts reported in the Company’s consolidated financial statements. We have identified investment valuation, revenue recognition and the recognition of capital gains incentive fee expense as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.
Investments for which market quotations are readily available are fair valued at such market quotations obtained from independent third party pricing services and market makers subject to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations are not readily available at fair value as approved, in good faith, by our board of directors based on input from SIA, the audit committee of our board of directors and a third party independent valuation firm. Determinations of fair value may involve subjective judgments and estimates. The types of factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors.
· Each investment is initially valued by the responsible investment professionals of SIA and preliminary valuation conclusions are documented and discussed with our senior management of SIA; and
34
· The audit committee of our board of directors reviews each preliminary valuation and SIA and independent valuation firm (if applicable) will supplement the preliminary valuation to reflect any comments provided by the audit committee; and
· Our board of directors discusses the valuations and approves the fair value of each investment, in good faith, based on the input of SIA, independent valuation firm (to the extent applicable) and the audit committee of our board of directors.
Revenue Recognition
Income Recognition
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. Discounts and premiums on investments purchased are accreted/amortized over the life of the respective investment using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortizations of premium on investments.
The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We stop accruing PIK interest if we do not expect the issuer to be able to pay all principal and interest when due.
35
Revenues
We generate revenue in the form of interest income and capital gains on the debt investments that we hold and capital gains, if any, on equity interests that we may acquire. We expect our debt investments, whether in the form of first and second lien term loans or mezzanine debt, to have terms of up to ten years, and to bear interest at either a fixed or floating rate. Interest on debt will be payable generally either quarterly or semi-annually. In some cases our debt investments may provide for a portion of the interest to be paid-in-kind (“PIK”). To the extent interest is paid-in-kind, it will be payable through the increase of the principal amount of the obligation by the amount of interest due on the then-outstanding aggregate principal amount of such obligation. The principal amount of the debt and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance or investment management services and possibly consulting fees. Any such fees will be generated in connection with our investments and recognized as earned. We may also invest in preferred equity securities that pay dividends on a current basis.
On January 22, 2008, we entered into a collateral management agreement with Saratoga CLO pursuant to which we act as its collateral manager and receive a senior collateral management fee of 0.10% and a subordinate collateral management fee of 0.40% of the outstanding principal amount of Saratoga CLO’s assets, paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20% of excess cash flow to the extent the Saratoga CLO subordinated notes receive an internal rate of return equal to or greater than 12%.
We recognize interest income on our investment in the subordinated notes of Saratoga CLO using the effective interest method, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.
Expenses
Our primary operating expenses include the payment of investment advisory and management fees, professional fees, directors and officers insurance, fees paid to independent directors and administrator expenses, including our allocable portion of our administrator’s overhead. Our investment advisory and management fees compensate our investment adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our operations and transactions, including those relating to:
· organization;
· calculating our net asset value (including the cost and expenses of any independent valuation firm);
· expenses incurred by our investment adviser payable to third parties, including agents, consultants or other advisers, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies;
· interest payable on debt, if any, incurred to finance our investments;
· offerings of our common stock and other securities;
· investment advisory and management fees;
· fees payable to third parties, including agents, consultants or other advisers, relating to, or associated with, evaluating and making investments;
· transfer agent and custodial fees;
· federal and state registration fees;
· all costs of registration and listing our common stock on any securities exchange;
· federal, state and local taxes;
· independent directors’ fees and expenses;
36
· costs of preparing and filing reports or other documents required by governmental bodies (including the SEC and the SBA);
· costs of any reports, proxy statements or other notices to common stockholders including printing costs;
· our fidelity bond, directors and officers errors and omissions liability insurance, and any other insurance premiums;
· direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and
· administration fees and all other expenses incurred by us or, if applicable, the administrator in connection with administering our business (including payments under the administration agreement based upon our allocable portion of the administrator’s overhead in performing its obligations under an administration agreement, including rent and the allocable portion of the cost of our officers and their respective staffs (including travel expenses)).
To the extent that any of our leveraged loans are denominated in a currency other than U.S. dollars, we may enter into currency hedging contracts to reduce our exposure to fluctuations in currency exchange rates. We may also enter into interest rate hedging agreements. Such hedging activities, which will be subject to compliance with applicable legal requirements, may include the use of interest rate caps, futures, options and forward contracts. Costs incurred in entering into or settling such contracts will be borne by us.
PORTFOLIO AND INVESTMENT ACTIVITY
Corporate Debt Portfolio Overview
At November 30, 2012
At February 29, 2012
($ in millions)
Number of investments(2)
Number of portfolio companies(2)
Average investment size(2)
Weighted average maturity(2)
3.2 years
3.0 years
Number of industries(2)
Average investment per portfolio company(2)
3.3
Non-Performing or delinquent investments(2)
6.6
Fixed rate debt (% of interest bearing portfolio)(1)
30.8 (35.5
18.7 (29.3
Weighted average current coupon(1)
12.3
13.0
Floating rate debt (% of interest bearing portfolio)(1)
56.0 (64.5
45.1 (70.7
Weighted average current spread over LIBOR(1)
7.3
7.4
(1) Excludes our investment in the subordinated notes of Saratoga CLO, equity interests and limited partnership interests.
(2) Excludes our investment in the subordinated notes of Saratoga CLO and limited partnership interests.
During the three months ended November 30, 2012, we made $6.4 million of investments in new or existing portfolio companies, had $1.5 million in aggregate amount of exits and repayments, resulting in net investments of $4.9 million for the period. During the three months ended November 30, 2011, we made $11.4 million of investments in new or existing portfolio companies, had $18.4 million in aggregate amount of exits and repayments, resulting in net repayments of $7.0 million for the period.
During the nine months ended November 30, 2012, we made $34.7 million of investments in new or existing portfolio companies, had $16.0 million in aggregate amount of exits and repayments, resulting in net investments of $18.7 million for the period. During the nine months ended November 30, 2011, we made $28.9 million of investments in new or existing portfolio companies, had $31.9 million in aggregate amount of exits and repayments, resulting in net repayments of $3.0 million for the period.
Our portfolio composition based on fair value at November 30, 2012 and February 29, 2012 was as follows:
37
Portfolio Composition
Percentage of Total Portfolio
Weighted Average Current Yield
10.0
10.1
11.3
9.3
16.8
16.0
15.0
19.9
19.3
Saratoga CLO subordinated notes
22.9
20.2
N/A
12.9
13.4
Our investment in the subordinated notes of Saratoga CLO represents a first loss position in a portfolio that, at November 30, 2012 and February 29, 2012, was composed of $393.4 million and $380.2 million, respectively, in aggregate principal amount of predominantly senior secured first lien term loans. This investment is subject to unique risks. Please see Part II, Item 1A “Risk Factors—Our investment in GSC Investment Corp. CLO 2007 LTD, constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility” in our annual report on Form 10-K for the year ended February 29, 2012 and “Note 4. Investment in GSC Investment Corp. CLO 2007 Ltd.” in this Quarterly Report on Form 10-Q for more information about Saratoga CLO. We do not consolidate the Saratoga CLO portfolio in our financial statements. Accordingly, the metrics below do not include the underlying Saratoga CLO portfolio investments. However, at November 30, 2012, 98.5% of the Saratoga CLO portfolio investments had a CMR (as defined below) color rating of green or yellow and one Saratoga CLO portfolio investment was in default. At February 29, 2012, 99.3% of the Saratoga CLO portfolio investments had a CMR color rating of green or yellow and one Saratoga CLO portfolio investments was in default.
SIA normally grades all of our investments using a credit and monitoring rating system (“CMR”). The CMR consists of a single component: a color rating. The color rating is based on several criteria, including financial and operating strength, probability of default, and restructuring risk. The color ratings are characterized as follows: (Green) - strong credit; (Yellow) - satisfactory credit; (Red) - payment default risk, in payment default and/or significant restructuring activity.
The CMR distribution of our investments at November 30, 2012 and February 29, 2012 was as follows:
Portfolio CMR Distribution
($ in thousands)
Green
63,151
52.9
41,069
43.1
Yellow
10,997
10,415
10.9
Red
12,715
10.7
12,340
N/A(1)
32,428
27.2
31,536
33.1
(1) Comprised of our investments in the subordinated notes of Saratoga CLO, equity interests and limited partnership interests.
The following table shows the portfolio composition by industry grouping at fair value at November 30, 2012 and February 29, 2012.
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Portfolio composition by industry grouping at fair value
Structured Finance Securities (1)
14,000
11.7
7,584
7.9
13,207
11.1
11,454
9.6
11,100
11.6
10,627
5,249
8,915
7.5
7,323
6,641
5.6
6,537
6.9
5,273
4.4
5,388
5.7
5,205
5,392
4,888
4,824
3,500
3.7
2,747
2,323
324
592
290
289
256
222
1.7
(1) Comprised of our investment in the subordinated notes of Saratoga CLO.
The following table shows the portfolio composition by geographic location at fair value at November 30, 2012 and February 29, 2012. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
Portfolio composition by geographic location at fair value
Southeast
42,235
35.4
19,878
20.8
Other(1)
West
20,043
21,615
22.7
Midwest
18,952
15.9
15,451
16.2
Northeast
13,420
12,570
13.2
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RESULTS OF OPERATIONS
Operating results for the three and nine months ended November 30, 2012 and 2011 are as follows:
4,034
3,629
Total expenses, net
1,545
2,805
2,489
824
Net realized gains (losses)
95
(5,832
(1,839
11,221
Net increase in net assets resulting from operations
745
11,816
10,065
6,740
5,942
5,076
4,123
412
(5,840
Net unrealized gains
3,319
11,912
Investment income
The composition of our investment income for the three and nine months ended November 30, 2012 and 2011 was as follows:
Investment Income
3,513
3,033
Management fee income from Saratoga CLO
500
502
Interest from cash and cash equivalents and other income
94
10,138
8,307
1,501
1,512
177
246
For the three months ended November 30, 2012, total investment income increased $0.4 million, or 11.2%, compared to the three months ended November 30, 2011. The increase in total investment income for the three months ended November 30, 2012 versus the three months ended November 30, 2011 was the result of higher interest income recognized on our non-control investments during the three months ended November 30, 2012.
For the nine months ended November 30, 2012, total investment income increased $1.8 million, or 17.4%, compared to the nine months ended November 30, 2011. The increase in total investment income for the nine months ended November 30, 2012 versus the nine months ended November 30, 2011 was the result of higher interest income recognized on our non- control investments during the nine months ended November 30, 2012.
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For the three and nine months ended November 30, 2012, total PIK income was $0.3 million and $0.8 million respectively. For the three and nine months ended November 30, 2011, total PIK income was $0.3 million and $1.2 million, respectively. For the three and nine months ended November 30, 2012, we accrued $0.5 million and $1.5 million in collateral management fee income, respectively, due from Saratoga CLO and $1.0 million and $3.2 million in interest income, respectively, due from Saratoga CLO. For the three and nine months ended November 30, 2011, we accrued $0.5 million and $1.5 million in collateral management fee income, respectively, due from Saratoga CLO and $1.2 million and $3.1 million in interest income, respectively, due from Saratoga CLO. The reinvestment period for the Saratoga CLO is scheduled to end in January 2013. Following the reinvestment period, proceeds from principal payments in the loan portfolio of Saratoga CLO will be used to pay down its outstanding notes, starting with Class A notes. As a result, the collateral management fee income and the interest income that we receive from the Saratoga CLO will start to decline in 2013.
The composition of our expenses for the three and nine months ended November 30, 2012 and 2011 was as follows:
Interest and credit facility expense
530
307
529
394
347
356
(413
1,179
250
Insurance expenses
129
145
Directors fees
51
General and administrative and other expenses
119
123
1,809
987
1,492
1,204
986
1,282
887
842
750
730
390
449
156
153
270
295
For the three months ended November 30, 2012, total expenses decreased $1.3 million, or 44.9%, compared to the three months ended November 30, 2011. The decrease is primarily related to a reversal of incentive management fees related to the decrease in unrealized appreciation on our investment in the Saratoga CLO, partially offset by an increase in interest and credit facility expense and base management fees due to the growth in our portfolio and amount of our outstanding debt.
For the nine months ended November 30, 2012, total expenses increased $0.8 million, or 13.4%, compared to the nine months ended November 30, 2011. These increases were primarily attributable to increases in interest and credit facility expense and base management fees due to the growth in our portfolio and amount of our outstanding debt.
As discussed above, the increase in interest and credit facility expense for the three and nine months ended November 30, 2012 is primarily attributable to an increase in the amount of outstanding debt as compared to the prior periods. In this regard, there were outstanding balances under our senior secured revolving credit facility with Madison Capital of $20.0 million at February 29, 2012 and $14.9 million at November 30, 2012. In the prior period, we had outstanding balances under our revolving securitized credit facility with Madison Capital of $4.5 million at February 29, 2011 and no outstanding balance at November 30, 2011. For the three and nine months ended November 30, 2012, the
41
weighted average interest rate on our outstanding indebtedness was 7.5%. For the three months ended November 30, 2011, there was no outstanding indebtedness. For the nine months ended November 30, 2011, the weighted average interest rate on our outstanding indebtedness was 7.5%.
Net Realized Gains/Losses from Investments
For the three months ended November 30, 2012, we had $1.5 million of sales, repayments, exits and restructurings, resulting in $0.1 million of net realized gains.
For the nine months ended November 30, 2012, we had $16.0 million of sales, repayments, exits and restructurings resulting in $0.5 million of net realized gains.
For the three months ended November 30, 2011, we had $18.4 million of sales, repayments, exits and restructurings, resulting in $5.8 million of net realized losses.
For the nine months ended November 30, 2011, we had $31.9 million of sales, repayments, exits and restructurings resulting in $5.8 million of net realized losses.
Net Unrealized Appreciation/Depreciation on Investments
For the three months ended November 30, 2012, our investments had a decrease in net unrealized appreciation of $1.8 million versus an increase in net unrealized appreciation of $11.2 million for the three months ended November 30, 2011. For the nine months ended November 30, 2012, our investments had an increase in net unrealized appreciation of $3.2 million versus an increase in net unrealized appreciation of $11.9 million for the nine months ended November 30, 2011.The most significant cumulative changes in unrealized appreciation for the nine months ended November 30, 2012 were the following:
Nine months ended November 30, 2012
Total Unrealized
Year-To-Date Change in Unrealized
Issuer
Asset Type
Appreciation
Targus Holdings, Inc.
567
3,732
3,165
1,056
Penton Media
First Lien Term Loan
4,442
4,285
(157
468
Saratoga CLO
4,279
The $1.1 million of unrealized appreciation on our investment in Targus Holdings, Inc. resulted from its improved operating performance and improved trading multiples of comparable publicly traded companies. In addition, the $0.5 million of unrealized appreciation on our investment in Penton Media resulted from its improved operating performance.
The $2.0 million of unrealized appreciation in our investment in the Saratoga CLO subordinated notes was due to higher relative cash flow projections (based on an improvement in the overall portfolio, a decrease in the assumed portfolio default rate) and a reduction in the CLO’s cost basis due to distributions during the year offset by a higher discount rate used to present value the cash flows based on current market conditions.
The most significant cumulative changes in unrealized appreciation and depreciation for the nine months ended November 30, 2011 were the following:
Nine months ended November 30, 2011
Appreciation/(Depreciation)
Pracs Institute, LTD.
Second Lien Term Loan
4,078
(4,078
(3,023
4,229
2,947
(1,282
(1,192
24,363
25,375
1,012
5,645
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The increase in unrealized depreciation in our investments in Pracs Institute, LTD. and Penton Media were due to declining prospects for the companies. The $5.6 million net unrealized appreciation in our investment in the Saratoga CLO subordinated notes was due to higher cash flow projections (based on an improvement in the overall portfolio, a decrease in the assumed portfolio default rate and an improvement in reinvestment assumptions based on current market conditions and projections) and a lower discount rate used to present value the cash flows based on current market conditions.
Changes in Net Assets from Operations
For the three months ended November 30, 2012, we recorded a net increase in net assets resulting from operations of $0.7 million versus a net increase in net assets resulting from operations of $6.2 million for the three months ended November 30, 2011. The difference is attributable to increase in net investment income, a decrease in net unrealized appreciation offset by an increase in net investment income for the three months ended November 30, 2012, as compared to the same period in the prior year. Based on 3,970,447 and 3,310,021 weighted average common shares outstanding for the three months ended November 30, 2012 and 2011, respectively, our per share net increase in net assets resulting from operations was $0.19 for the three months ended November 30, 2012 versus a per share net increase in net assets resulting from operations of $1.88 for the three months ended November 30, 2011.
For the nine months ended November 30, 2012, we recorded a net increase in net assets resulting from operations of $8.8 million versus a net increase in net assets resulting from operations of $10.2 million for the nine months ended November 30, 2011. The difference is attributable to an increase in net investment income, a decrease in net unrealized appreciation offset by an increase in net investment income for the nine months ended November 30, 2012, as compared to the same period in the prior year. Based on 3,907,696 and 3,287,979 weighted average common shares outstanding for the nine months ended November 30, 2012 and 2011, respectively, our per share net increase in net assets resulting from operations was $2.25 for the nine months ended November 30, 2012 versus a per share net increase in net assets resulting from operations of $3.10 for the nine months ended November 30, 2011.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Below is a summary of the terms of the senior secured revolving credit facility we entered into with Madison Capital Funding (the “Replacement Facility”) on June 30, 2010.
Availability. The Company can draw up to the lesser of (i) $40 million (the “Facility Amount”) and (ii) the product of the applicable advance rate (which varies from 50% to 75% depending on the type of loan asset) and the value, determined in accordance with the Replacement Facility (the “Adjusted Borrowing Value”), of certain “eligible” loan assets pledged as security for the loan (the “Borrowing Base”), in each case less (a) the amount of any undrawn funding commitments the Company has under any loan asset and which are not covered by amounts in the Unfunded Exposure Account referred to below (the “Unfunded Exposure Amount”) and (b) outstanding borrowings. Each loan asset held by the Company as of the date on which the Replacement Facility was closed was valued as of that date and each loan asset that the Company acquires after such date will be valued at the lowest of its fair value, its face value (excluding accrued interest) and the purchase price paid for such loan asset. Adjustments to the value of a loan asset will be made to reflect, among other things, changes in its fair value, a default by the obligor on the loan asset, insolvency of the obligor, acceleration of the loan asset, and certain modifications to the terms of the loan asset.
The Replacement Facility contains limitations on the type of loan assets that are “eligible” to be included in the Borrowing Base and as to the concentration level of certain categories of loan assets in the Borrowing Base such as restrictions on geographic and industry concentrations, asset size and quality, payment frequency, status and terms, average life, and collateral interests. In addition, if an asset is to remain an “eligible” loan asset, the Company may not make changes to the payment, amortization, collateral and certain other terms of the loan assets without the consent of the administrative agent that will either result in subordination of the loan asset or be materially adverse to the lenders.
Collateral. The Replacement Facility is secured by substantially all of the assets of the Company and includes the subordinated notes (“CLO Notes”) issued by Saratoga CLO and the Company’s rights under the CLO Management Agreement (as defined below).
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Interest Rate and Fees. Under the Replacement Facility, funds are borrowed from or through certain lenders at the greater of the prevailing LIBOR rate and 2.00%, plus an applicable margin of 5.50%. At the Company’s option, funds may be borrowed based on an alternative base rate, which in no event will be less than 3.00%, and the applicable margin over such alternative base rate is 4.50%. In addition, the Company pays the lenders a commitment fee of 0.75% per year on the unused amount of the Replacement Facility for the duration of the Revolving Period (defined below). Accrued interest and commitment fees are payable monthly. The Company is also obligated to pay certain other fees to the lenders in connection with the closing of the Replacement Facility.
Revolving Period and Maturity Date. The Company may make and repay borrowings under the Replacement Facility for a period of three years following the closing of the Replacement Facility (the “Revolving Period”). The Revolving Period may be terminated at an earlier time by the Company or, upon the occurrence of an event of default, by action of the lenders or automatically. All borrowings and other amounts payable under the Replacement Facility are due and payable in full five years after the end of the Revolving Period.
Collateral Tests. It is a condition precedent to any borrowing under the Replacement Facility that the principal amount outstanding under the Replacement Facility, after giving effect to the proposed borrowings, not exceed the lesser of the Borrowing Base or the Facility Amount (the “Borrowing Base Test”). In addition to satisfying the Borrowing Base Test, the following tests must also be satisfied (together with Borrowing Base Test, the “Collateral Tests”):
· Interest Coverage Ratio. The ratio (expressed as a percentage) of interest collections with respect to pledged loan assets, less certain fees and expenses relating to the Replacement Facility, to accrued interest and commitment fees and any breakage costs payable to the lenders under the Replacement Facility for the last 6 payment periods must equal at least 175%.
· Overcollateralization Ratio. The ratio (expressed as a percentage) of the aggregate Adjusted Borrowing Value of “eligible” pledged loan assets plus the fair value of certain ineligible pledged loan assets and the CLO Notes (in each case, subject to certain adjustments) to outstanding borrowings under the Replacement Facility plus the Unfunded Exposure Amount must equal at least 200%.
· Weighted Average FMV Test. The aggregate adjusted or weighted value of “eligible” pledged loan assets as a percentage of the aggregate outstanding principal balance of “eligible” pledged loan assets must be equal to or greater than 72% and 80% during the one-year periods prior to the first and second anniversary of the closing date, respectively, and 85% at all times thereafter.
The Replacement Facility also requires payment of outstanding borrowings or replacement of pledged loan assets upon the Company’s breach of its representation and warranty that pledged loan assets included in the Borrowing Base are “eligible” loan assets. Such payments or replacements must equal the lower of the amount by which the Borrowing Base is overstated as a result of such breach or any deficiency under the Collateral Tests at the time of repayment or replacement. Compliance with the Collateral Tests is also a condition to the discretionary sale of pledged loan assets by the Company.
Priority of Payments. During the Revolving Period, the priority of payments provisions of the Replacement Facility require, after payment of specified fees and expenses and any necessary funding of the Unfunded Exposure Account, that collections of principal from the loan assets and, to the extent that these are insufficient, collections of interest from the loan assets, be applied on each payment date to payment of outstanding borrowings if the Borrowing Base Test, the Overcollateralization Ratio and the Interest Coverage Ratio would not otherwise be met. Similarly, following termination of the Revolving Period, collections of interest are required to be applied, after payment of certain fees and expenses, to cure any deficiencies in the Borrowing Base Test, the Interest Coverage Ratio and the Overcollateralization Ratio as of the relevant payment date.
Reserve Account. The Replacement Facility requires the Company to set aside an amount equal to the sum of accrued interest, commitment fees and administrative agent fees due and payable on the next succeeding three payment dates (or corresponding to three payment periods). If for any monthly period during which fees and other payments accrue, the aggregate Adjusted Borrowing Value of “eligible” pledged loan assets which do not pay cash interest at least quarterly exceeds 15% of the aggregate Adjusted Borrowing Value of “eligible” pledged loan assets, the Company is required to set aside such interest and fees due and payable on the next succeeding six payment dates. Amounts in the reserve account can be applied solely to the payment of administrative agent fees, commitment fees, accrued and unpaid interest and any breakage costs payable to the lenders.
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Unfunded Exposure Account. With respect to revolver or delayed draw loan assets, the Company is required to set aside in a designated account (the “Unfunded Exposure Account”) 100% of its outstanding and undrawn funding commitments with respect to such loan assets. The Unfunded Exposure Account is funded at the time the Company acquires a revolver or delayed draw loan asset and requests a related borrowing under the Replacement Facility. The Unfunded Exposure Account is funded through a combination of proceeds of the requested borrowing and other Company funds, and if for any reason such amounts are insufficient, through application of the priority of payment provisions described above.
Operating Expenses. The priority of payments provision of the Replacement Facility provides for the payment of certain operating expenses of the Company out of collections on principal and interest during the Revolving Period and out of collections on interest following the termination of the Revolving Period in accordance with the priority established in such provision. The operating expenses payable pursuant to the priority of payment provisions is limited to $350,000 for each monthly payment date or $2.5 million for the immediately preceding period of twelve consecutive monthly payment dates. This ceiling can be increased by the lesser of 5% or the percentage increase in the fair market value of all the Company’s assets only on the first monthly payment date to occur after each one-year anniversary following the closing of the Replacement Facility. Upon the occurrence of a Manager Event (described below), the consent of the administrative agent is required in order to pay operating expenses through the priority of payments provision.
Events of Default. The Replacement Facility contains certain negative covenants, customary representations and warranties and affirmative covenants and events of default. The Replacement Facility does not contain grace periods for breach by the Company of certain covenants, including, without limitation, preservation of existence, negative pledge, change of name or jurisdiction and separate legal entity status of the Company covenants and certain other customary covenants. Other events of default under the Replacement Facility include, among other things, the following:
· an Interest Coverage Ratio of less than 150%;
· an Overcollateralization Ratio of less than 175%;
· the filing of certain ERISA or tax liens;
· the occurrence of certain “Manager Events” such as:
· failure by SIA and its affiliates to maintain collectively, directly or indirectly, a cash equity investment in the Company in an amount equal to at least $5,000,000 at any time prior to the third anniversary of the closing date;
· failure of the management agreement between SIA and the Company to be in full force and effect;
· indictment or conviction of SIA or any “key person” for a felony offense, or any fraud, embezzlement or misappropriation of funds by SIA or any “key person” and, in the case of “key persons,” without a reputable, experienced individual reasonably satisfactory to Madison Capital Funding appointed to replace such key person within 30 days;
· resignation, termination, disability or death of a “key person” or failure of any “key person” to provide active participation in SIA daily activities, all without a reputable, experienced individual reasonably satisfactory to Madison Capital Funding appointed within 30 days; or
· occurrence of any event constituting “cause” under the Collateral Management Agreement between the Company and Saratoga CLO (the “CLO Management Agreement”), delivery of a notice under Section 12(c) of the CLO Management Agreement with respect to the removal of the Company as collateral manager or the Company ceases to act as collateral manager under the CLO Management Agreement.
Conditions to Acquisitions and Pledges of Loan Assets. The Replacement Facility imposes certain additional conditions to the acquisition and pledge of additional loan assets. Among other things, the Company may not acquire additional loan assets without the prior written consent of the administrative agent until such time that the administrative agent indicates in writing its satisfaction with SIA’s policies, personnel and processes relating to the loan assets.
Fees and Expenses. The Company paid certain fees and reimbursed Madison Capital Funding for the aggregate amount of all documented, out-of-pocket costs and expenses, including the reasonable fees and expenses of lawyers, incurred
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by Madison Capital Funding in connection with the Replacement Facility and the carrying out of any and all acts contemplated thereunder up to and as of the date of closing of the stock purchase transaction with SIA and certain of its affiliates. These amounts totaled $2.0 million.
On February 24, 2012, we amended the Replacement facility with Madison Capital Funding to, among other things:
· extend the Revolving Period from July 30, 2013 to February 24, 2015; and
· remove the condition that we may not acquire additional loan assets without the prior written consent of the administrative agent.
As of November 30, 2012, we had $14.9 million outstanding under the Replacement Facility and $4.0 million SBA-guaranteed debentures outstanding (which are discussed below). Our borrowing base under the Replacement Facility was $27.7 million at November 30, 2012.
Our asset coverage ratio, as defined in the 1940 Act, was 792.88% as of November 30, 2012 and 587% as of February 29, 2012.
We intend to continue to generate cash primarily from cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less, future borrowings and future offerings of securities.
Although we expect to fund the growth of our investment portfolio through the net proceeds from future equity offerings, including our dividend reinvestment plan, and issuances of senior securities or future borrowings, to the extent permitted by the 1940 Act, we cannot assure you that our plans to raise capital will be successful. In this regard, because our common stock has historically traded at a price below our current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we have been and may continue to be limited in our ability to raise equity capital. Our stockholders approved a proposal at our annual meeting of stockholders held on September 28, 2012 that authorizes us to sell shares of our common stock at an offering price per share to investors that is not less than 85% of our then current net asset value per share in one or more offerings for a period ending on the earlier of September 28, 2013 or the date of our next annual meeting of stockholders. We would need stockholder approval of a similar proposal to issue shares below net asset value per share at any time after the earlier of September 27, 2012 or our next annual meeting of stockholders.
In addition, we intend to distribute to our stockholders substantially all of our taxable income in order to satisfy the distribution requirement applicable to RICs under Subchapter M of the Code. In satisfying this distribution requirement, we have in the past relied on IRS issued private letter rulings concluding that a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20% of the aggregate declared distribution. We may rely on these IRS private letter rulings in future periods to satisfy our RIC distribution requirement.
Also, as a BDC, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200%. This requirement limits the amount that we may borrow. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and other debt-related markets, which may or may not be available on favorable terms, if at all.
Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. Also, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
Finally, in light of the conditions in the financial markets and the U.S. economy overall, we, through a wholly-owned subsidiary, sought and obtained a license from the SBA to operate an SBIC. In this regard, on March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP, received a license from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958. SBICs are designated to stimulate the flow of private
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equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses.
The SBIC license allows our SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities.
SBA regulations currently limit the amount that our SBIC subsidiary may borrow to a maximum of $150 million when it has at least $75 million in regulatory capital, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. As of November 30, 2012, our SBIC subsidiary had $25 million in regulatory capital and $4.0 million SBA-guaranteed debentures outstanding.
We received exemptive relief from the Securities and Exchange Commission to permit us to exclude the debt of our SBIC subsidiary guaranteed by the SBA from the definition of senior securities in the 200% asset coverage test under the 1940 Act. This allows us increased flexibility under the 200% asset coverage test by permitting us to borrow up to $150 million more than we would otherwise be able to absent the receipt of this exemptive relief.
We cannot provide any assurance that these measures will provide sufficient sources of liquidity to support our operations and growth given the continued instability in the financial markets and the weak U.S. economy.
Contractual Obligations
The following table shows our payment obligations for repayment of debt and other contractual obligations at November 30, 2012:
Payment Due by Period
Less Than 1 Year
1 - 3 Years
3 - 5 Years
More Than 5 Years
Long-Term Debt Obligations
18,850
14,850
4,000
OFF-BALANCE SHEET ARRANGEMENTS
At November 30, 2012 and February 29, 2012, we did not have any off-balance sheet arrangements, including unfunded commitments to extend credit to third-parties, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our market risks have not changed materially from the risks reported in our Form 10-K for the year ended February 29, 2012.
Item 4. Controls and Procedures
(a) As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, our chief executive officer and our chief financial officer have concluded that our current disclosure controls and procedures are effective in facilitating timely decisions regarding required disclosure of any material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.
(b) There have been no changes in our internal control over financial reporting that occurred during the quarter ended November 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 31, 2012, a complaint was filed in the United States Bankruptcy Court for the Southern District of New York by GSC Acquisition Holdings, LLC against us to recover, among other things, approximately $2.6 million for the benefit of the estates and the general unsecured creditors of GSC Group, Inc. and its affiliates, including the Company’s former investment adviser, GSCP (NJ), L.P. The complaint alleges that the former investment adviser made a constructively fraudulent transfer of $2.6 million in deferred incentive fees by waiving them in connection with the termination of an investment advisory and management agreement with us, and that the termination of the investment advisory and management agreement was itself a fraudulent transfer. These transfers, the complaint alleges, were made without receipt of reasonably equivalent value and while the former investment adviser was insolvent. The complaint has not yet been served, and the plaintiff’s motion for authority to prosecute the case on behalf of the estates was taken under advisement by the court on October 1, 2012. We opposed that motion. We believe that the claims in this lawsuit are without merit and, if the plaintiff is authorized to proceed, intend to vigorously defend against this action.
Except as discussed above, neither we nor our wholly-owned subsidiaries, Saratoga Investment Funding LLC and Saratoga Investment Corp. SBIC LP, are currently subject to any material legal proceedings.
Item 1A. Risk Factors
There have been no material changes from the risk factors set forth in our annual report on Form 10-K for the year ended February 29, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Listed below are the exhibits which are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):
Exhibit Number
Description of Document
31.1*
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2*
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1*
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
32.2*
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
* Submitted herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: January 14, 2013
By
/s/ Christian L. Oberbeck
Christian L. Oberbeck
Chief Executive Officer and President
/s/ Richard A. Petrocelli
Richard A. Petrocelli
Chief Financial Officer, Chief Compliance Officer and Secretary