UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________________
FORM
10-K
_______________________
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended February 28, 2007
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from
to
Commission
File No. 001-33376
_______________________
GSC
Investment Corp.(Exact
name of Registrant as specified in its charter)
_______________________
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Maryland
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20-8700615
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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12
East 49th Street,
Suite 3200
New
York, New York 10017
(Address
of principal executive offices)
(212)
884-6200
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange
on
which registered
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Common
Shares, par value $0.0001 per share
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The
New York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
_______________________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes ¨ No x
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 ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
The
aggregate market value of the voting and non-voting common stock held by
non-affiliates of the registrant as of May 21, 2007 was approximately $100.2
million based upon a closing price of $13.85 reported for such date by the
New
York Stock Exchange. Common shares held by each executive officer and director
and by each person who owns 5% or more of the outstanding common shares have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The
number
of outstanding common shares of the registrant as of May 21, 2007 was
8,291,384.
NOTE
ABOUT REFERENCES TO GSC INVESTMENT CORP.
In
this
Annual Report on Form 10-K (the “Annual Report”), the “Company”, “we”, “us” and
“our” refer to GSC Investment Corp., its subsidiaries and related companies,
unless the context otherwise requires.
NOTE
ABOUT TRADEMARKS
We
have entered into a license agreement
with GSC Group, pursuant to which GSC Group grants us a non-exclusive,
royalty-free license to use
the “GSC”
name and logo.
NOTE
ABOUT FORWARD-LOOKING STATEMENTS
Some
of
the statements under “Risk Factors” and “Business” and elsewhere in this
annual report constitute forward-looking statements. Forward-looking statements
relate to expectations, beliefs, projections, future plans and strategies,
anticipated events or trends and similar expressions concerning matters that
are
not historical facts. In some cases, you can identify forward-looking statements
by terms such as
“anticipate,”“believe,”“could,”“estimate,”“expect,”“intend,”“may,”“plan,”“potential,”“project,”“should,”“will”
and “would” or the negative of these terms or other comparable terminology. Any
forward-looking statements contained in this annual report do not have the
benefit of the safe harbor for forward-looking statements pursuant to
Section 27A of the Securities Act of 1933.
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 annual
report involve risks and
uncertainties, including the risks listed under “Risk Factors”
herein as well as the statements
as
to:
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our
limited operating
history;
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changes
in economic conditions
generally;
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our
dependence on GSCP (NJ), L.P.,
our investment adviser, and ability to find a suitable replacement
if our
investment
adviser
were to terminate its investment advisory and management agreement
with
us;
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the
existence of conflicts of
interest in our relationship with GSCP (NJ), L.P. and/or its affiliates,
which could result in decisions that are not in the best
interests of our
stockholders;
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limitations
imposed on our
business by our election to be treated as a BDC under the 1940
Act;
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| • | changes in our business strategy; | |
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general
volatility of the
securities markets
and the market price of our common stock;
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availability
of qualified
personnel;
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1
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changes
in our industry, interest
rates or the general economy;
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the
degree and nature of our
competition; and
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changes
in governmental
regulations, tax laws
and tax rates and other similar matters which may affect us and
our
stockholders.
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For
a
discussion of factors that could cause our actual results to differ from
forward-looking statements contained in this Annual Report, please see the
discussion under “Risk Factors” in Item 1A. You should not place undue
reliance on these forward-looking statements. The forward-looking statements
made in this Annual Report 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
Annual Report.
TABLE
OF CONTENTS
Page
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PART I
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Item 1.
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Business
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1
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Item 1A.
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Risk
Factors
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21
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Item 1B.
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Unresolved
Staff Comments
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38
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Item 2.
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Properties
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38
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Item 3.
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Legal
Proceedings
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38
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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38
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PART
II
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Item 5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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39
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Item 6.
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Selected
Financial Data
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40
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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40
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Item 7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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43
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Item 8.
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Financial
Statements and Supplementary Data
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44
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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44
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Item 9A.
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Controls
and Procedures
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44
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Item 9B.
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Other
Information
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44
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PART III
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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45
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Item 11.
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Executive
Compensation
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51
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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51
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence
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52
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Item 14.
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Principal
Accountant Fees and Services
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54
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PART IV
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Item 15.
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Exhibits
and Financial Statement Schedules
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55
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Signatures
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58
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Financial
Statements
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F-1
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Business
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General
GSC
Investment Corp. is a newly-incorporated 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 objectives are to generate
both current income and capital appreciation through debt and equity investments
by primarily investing in private middle market companies and select high yield
bonds. We have filed an election to be treated as a regulated investment company
(“RIC”) under subchapter M of the Internal Revenue Code commencing with our
first taxable year as a corporation. We commenced operations on March
23, 2007 and completed our initial public offering (“IPO”) on March 28,
2007.
We
used the net proceeds of our IPO to
acquire portfolios in March and April 2007 of approximately $89.5 million and
$11.2 million, respectively, in aggregate principal amount of debt investments
composed of first lien and second lien loans, senior secured bonds and unsecured
bonds purchased from GSC Partners
CDO Fund III,
Limited (“CDO Fund III”)
a CDO managed by our investment
adviser. We used borrowings under our revolving securitized
credit facility and our term securitized credit facility to acquire additional
debt investments of approximately $55.8 million and $59.3 million in aggregate
principal amount in April and May 2007, respectively from CDO Fund III and
GSC
Partners CDO Fund Limited (“CDO Fund I”), another CDO also managed by our
investment adviser.
Our
portfolio is composed primarily of investments in first and second lien loans
and mezzanine debt issued by private companies and high yield bonds that are
sourced through a network of relationships with commercial finance companies,
commercial and investment banks, and financial sponsors. The capital that we
provide is generally used to fund buyouts, acquisitions, growth,
recapitalizations and other types of financings. First and second lien loans
are
generally senior debt instruments that rank ahead of subordinated debt of the
portfolio company. These loans also have the benefit of security interests
on
the assets of the portfolio company, which may rank ahead of, or be junior
to,
other security interests. Mezzanine debt and high yield bonds are typically
subordinated to leveraged loans and generally unsecured, though a substantial
amount of the high yield bonds that we currently own are
secured. Substantially all of the debt investments held in our
portfolio hold a non-investment grade rating by Moody’s Investors Service and/or
Standard & Poor’s or, if not rated, would be rated below investment grade if
rated. Debt securities rated below investment grade are commonly
referred to as “junk bonds.” In some cases, we may also receive
warrants or options in connection with our debt investments. We also anticipate
making equity investments in private middle market companies.
While
our
primary focus is to generate both current income and capital appreciation
through investments in debt and equity securities of private middle market
companies and high-yield bonds, we intend to invest up to 30% of our assets
in
opportunistic investments. Opportunistic investments may include investments
in
distressed debt, debt and equity securities of public companies, credit default
swaps, emerging market debt, and structured finance vehicles, including
collateralized debt obligations (“CDO”) holding debt, equity or synthetic
securities. As part of this 30%, we may also invest in debt of private middle
market companies located outside the United States. Given our primary investment
focus on first and second lien loans and mezzanine debt in private companies
and
high yield bonds, we believe our opportunistic investments will allow us to
supplement our core investments with other investments that are
within
our
investment adviser’s expertise that we believe offer attractive yields and/or
the potential for capital appreciation.
About
GSC Group
GSC
Group
was founded in 1999 by Alfred C. Eckert III, its Chairman and Chief
Executive Officer. Its senior officers and advisers are in many cases long-time
colleagues who have worked together extensively at other institutions, including
Goldman, Sachs & Co., Greenwich Street Capital Partners and The
Blackstone Group. GSC Group specializes in credit-based alternative investment
strategies including corporate credit, distressed investing and real estate.
GSC
Group is privately owned and has over 180 employees with headquarters in New
Jersey, and offices in New York, London and Los Angeles. GSC
Group conducts its investment advisory business through GSCP (NJ), L.P., an
SEC
registered investment adviser with approximately $25 billion of assets under
management (including leverage and warehoused assets) as of March 31,
2007.
GSC
Group
operates in three main business lines: (i) the corporate credit group,
which is comprised of 26 investment professionals who manage approximately
$8.5
billion of assets in leveraged loans, high yield bonds, mezzanine debt and
derivative products with investments in more than 450 companies; (ii) the
equity and distressed investing group, which is comprised of 19 investment
professionals who manage approximately $1.3 billion of assets in three control
distressed debt funds and a long/short credit strategies hedge fund; and
(iii) the real estate group, which is comprised of 18 investment
professionals managing $15.0 billion of assets in various synthetic and hybrid
collateralized debt obligation funds, a real estate investment trust and a
structured products hedge fund.
Our
investment adviser
We
are
externally managed and advised by our investment adviser, GSCP (NJ), L.P. Our
Chairman Richard M. Hayden and Chief Executive Officer Thomas V. Inglesby have
management responsibility for GSC Group’s corporate credit group and are senior
managers of our investment adviser. Mr. Hayden and Mr. Inglesby have
over 36 years and 20 years experience in the financial services
industry, respectively. Mr. Hayden and Mr. Inglesby are supported by
the 24 investment professionals within GSC Group’s corporate credit group.
Additionally, the Company has access to 37 investment professionals in GSC
Group’s equity and distressed investing group and GSC Group’s real estate
group.
Our
investment adviser is responsible for administering our business activities
and
day-to-day operations and uses the resources of GSC Group to support our
operations. Our investment adviser is able to leverage GSC Group’s current
investment platform, resources and existing relationships with financial
institutions, financial sponsors, hedge funds and other investment firms to
provide us with attractive investment opportunities. In addition to deal flow,
the GSC Group investment platform assists our investment adviser in analyzing
and monitoring investments. In particular, these resources provide us with
a
wide variety of investment opportunities and information that assists us in
making investment decisions across our targeted asset classes, which we believe
provide us with a competitive advantage. GSC Group has been investing in
corporate debt since its founding in 1999. In addition to having
access to its more than 63 investment professionals, we also have access to
over
100 GSC Group administrative professionals who provide assistance in accounting,
legal, compliance and investor relations.
2
Our
relationship with our investment adviser and GSC Group
We
currently have no employees, and each of our executive officers is also an
employee of GSC Group. GSC Group and its affiliates currently own
1,030,389 shares of our common stock.
On
March
21, 2007, we entered into an investment advisory and management agreement with
our investment adviser. The initial term of the investment advisory and
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. Pursuant to the investment advisory and management agreement,
our
investment adviser 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 investment adviser is responsible for, among other duties,
performing all of our day-to-day functions, determining investment criteria,
sourcing, analyzing and executing investments, asset sales, financings and
performing asset management duties. Under our investment advisory and
management agreement, we have agreed to pay our investment adviser an annual
base management fee based on our total assets, as defined under the 1940 Act
(other than cash and cash equivalents but including assets purchased with
borrowed funds), and an incentive fee based on our performance.
Pursuant
to our investment advisory and management agreement, our investment adviser
has
formed an investment committee to advise and consult with our investment
adviser’s senior management team with respect to our investment policies,
investment portfolio holdings, financing and leveraging strategies and
investment guidelines. We believe that the cumulative experience of the
investment committee members across a variety of fixed income asset classes
benefits us. Along with GSC Group’s corporate credit group’s
investment staff, the investment committee monitors investments in our
portfolio.
Market
opportunity
We
believe
the environment for investing in private middle market companies is attractive
for the following reasons:
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middle
market debt securities are
attractive compared to broadly syndicated
debt securities because middle
market debt securities generally have more conservative capital
structures, tighter financial covenants, better security packages
and
higher yields.
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established
relationships create a
high barrier to entry in the middle market financing business.
Specifically, private
middle market companies and their
financial sponsors prefer to access capital from and maintain close
and
longstanding relationships with
a small group of
well-known capital providers.
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the
middle market debt segment is
a highly fragmented portion of the leveraged finance market. We believe
that many of the largest capital providers in the broader leveraged
finance market choose
not to participate in middle market lending because of a preference
for
larger, more liquid
transactions.
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we
expect continued strong
leveraged
buyout activity from private
equity firms who currently hold
large pools of uninvested capital earmarked
for acquisitions
of private
middle market companies. These
private
equity firms will continue to
seek to leverage their investments by combining their equity capital
with
leveraged
loans and mezzanine debt from
other sources.
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3
Competitive
advantages
Although
we have a limited prior operating history and our investment advisor has no
experience managing a BDC, we believe that through our relationship with GSC
Group we enjoy several competitive advantages over other capital providers
to
private middle market companies.
GSC
Group’s investment platform
GSC
Group
has a long history of strong performance across a broad range of asset classes
and sectors. The senior investment professionals of GSC Group have extensive
experience investing in leveraged loans, high-yield bonds, mezzanine debt and
private equity. GSC Group’s corporate credit group has drawn from its
extensive middle market investment experience to develop a rigorous investment
process that emphasizes detailed business and financial analysis to minimize
principal loss while maximizing risk adjusted returns.
Experience
sourcing and managing middle market loans
GSC
Group’s corporate credit group has historically focused on investments in
private middle market companies and we expect to benefit from this experience.
Our investment adviser uses GSC Group’s extensive network of relationships with
intermediaries focused on private middle market companies to attract
well-positioned prospective portfolio company investments. Since 2003, GSC
Group’s corporate credit group has reviewed over 1060 new middle market loan
opportunities, including 370 second lien loans. Of the loans reviewed, 307
were
purchased, including 54 second lien loans. In addition, GSC Group’s corporate
credit group consults with GSC Group’s equity and distressed debt and European
mezzanine groups, which oversee a portfolio of investments in over 145
companies, maintain an extensive network of relationships and possess valuable
insights into industry trends.
Experienced
management and investment committee
Thomas
V.
Inglesby, our Chief Executive Officer and a Senior Managing Director of GSC
Group, has over 20 years of middle market investing experience, having
managed leveraged loan, high-yield bond, mezzanine debt, distressed debt and
private equity portfolios. In addition to Mr. Inglesby, our investment
committee consists of Richard M. Hayden, Robert F. Cummings, Jr., Thomas J.
Libassi and Daniel I. Castro, Jr. Mr. Hayden is Vice
Chairman of GSC Group, head of the corporate credit group and a member of GSC
Group’s management committee. Mr. Hayden was previously with Goldman,
Sachs & Co. from 1969 until 1999. Mr. Cummings is a Senior
Managing Director of GSC Group, Chairman of the risk and conflicts committee,
Chairman of the valuation committee and a member of GSC Group’s management
committee. Mr. Cummings was previously with Goldman, Sachs & Co.
from 1973 to 1998. Mr. Libassi is a Senior Managing Director of GSC Group
in the equity and distressed debt group and has 23 years of experience
managing high-yield and distressed debt portfolios. Mr. Castro is a
Managing Director of GSC Group in the real estate group. Mr. Castro has
over 24 years of experience investing in debt products and was, until 2004,
on the Institutional Investor All-American Fixed Income Research Team every
year
since its inception in 1992.
4
Extensive
transaction sourcing network and relationships with middle market
lenders
We
intend
to capitalize on the diverse deal-sourcing opportunities that we believe GSC
Group brings to us as a result of its investment experience in our targeted
asset classes, track record and extensive network of contacts in the financial
community, including financial sponsors, merger and acquisition advisory firms,
investment banks, capital markets desks, lenders and other financial
intermediaries and sponsors. In addition, through its other activities, GSC
Group is regularly in contact with portfolio company management teams that
can
help provide additional insights on a wide variety of companies and
industries.
In
particular, GSC Group has developed its middle market franchise via extensive
relationships with middle market loan originators. These relationships have
been
developed over the past 15 years at multiple levels of management within
GSC Group and have resulted in GSC Group’s ability to generate a significant
amount of middle market opportunities, including first and second lien loans
and
mezzanine debt securities. We believe that these relationships will continue
to
provide GSC Group with access to middle market debt securities.
Flexible
transaction structuring
We
expect
to be flexible in structuring investments, the types of securities in which
we
invest and the terms associated with such investments. The principals of GSC
Group have extensive experience in a wide variety of securities for private
middle market companies with a diverse set of terms and conditions. This
approach and experience should enable our investment adviser to identify
attractive investment opportunities throughout various economic cycles and
across a company’s capital structure so that we can make investments consistent
with our stated objectives.
Access
to GSC Group’s infrastructure
We
have
access to GSC Group’s finance and administration infrastructure, which addresses
information technology, risk management, legal and compliance, and operational
matters, and promulgates and administers comprehensive policies and procedures
regarding important investment adviser matters, including portfolio management,
trade allocation and execution and securities valuation. We believe that the
finance and administrative infrastructure established by GSC Group is an
important component of a complex investment vehicle such as a BDC. These systems
support, and are integrated with, our portfolio management
functions.
We
also
have the benefit of the experience of GSC Group’s senior professionals and
members of its advisory board, many of whom have served on public and private
company boards and/or served in other senior management roles.
Investments
As
of May
1, 2007, our portfolio consisted of $212.7 million in assets. We are
seeking to create a diversified portfolio that includes first and second lien
loans, mezzanine debt and high-yield bonds by investing up to 5% of capital
in
each investment, although the investment sizes may be more or less than the
targeted range. As of May 1, 2007, we invested in excess of 5% of our capital
in
4 of our 44 investments, but in each case less than 11% of our capital, and
our
five largest investments represented approximately 38% of our total
assets. We also anticipate making equity investments in private
middle market companies. In this Annual Report, we generally use the term
“middle market” to refer to companies with annual EBITDA of between
$5 million and $50 million. EBITDA represents earnings before net
interest expense, income taxes, depreciation and amortization.
5
First
lien loans
First
lien
loans are secured by a first priority perfected security interest on all or
substantially all of the assets of the borrower and typically include a first
priority pledge of the capital stock of the borrower. First lien loans hold
a
first priority with regard to right of payment. Generally, first lien loans
offer floating rate interest payments, have a stated maturity of five to seven
years, and have a fixed amortization schedule. First lien loans generally have
restrictive financial and negative covenants.
Second
lien loans
Second
lien loans are secured by a second priority perfected security interest on
all
or substantially all of the assets of the borrower and typically include a
second priority pledge of the capital stock of the borrower. Second lien loans
hold a second priority with regard to right of payment. Second lien loans offer
either floating rate or fixed rate interest payments, generally have a stated
maturity of five to eight years, and may or may not have a fixed amortization
schedule. Second lien loans that do not have fixed amortization schedules
require payment of the principal amount of the loan upon the maturity date
of
the loan. Second lien loans have less restrictive financial and negative
covenants than those that govern first lien loans.
Senior
secured bonds
Senior
secured bonds are secured by a perfected security interest on all or
substantially all of the assets of the borrower, but which may be contractually
subordinated to liens on certain assets of the borrower. In addition,
senior secured bonds may have a pledge of the capital stock of the
borrower. Senior secured bonds offer either floating rate or fixed
rate interest payments and generally have a stated maturity of five to eight
years and do not have fixed amortization schedules. Senior secured
bonds generally have less restrictive financial and negative covenants than
those that govern first lien and second lien loans.
Unsecured
bonds
Unsecured
bonds are not secured by the underlying assets or collateral of the issuer
and
may be subordinate in priority of payment to senior debt of the issuer. In
the
event of the borrower’s liquidation, dissolution, reorganization, bankruptcy or
other similar proceeding, the bondholders only have the right to share pari
passu in the issuer’s unsecured assets with other equally-ranking creditors of
the issuer. Unsecured bonds typically have fixed rate interest payments and
a
stated maturity of five to ten years and do not have fixed amortization
schedules.
Mezzanine
debt
Mezzanine
debt usually ranks subordinate
in priority of payment to senior debt and is often unsecured. However, mezzanine
debt ranks senior to common
and preferred equity in a borrowers’
capital structure. Mezzanine debt
typically has fixed rate interest payments and a stated maturity of
six
to eight years and does not have fixed amortization
schedules.
In
some
cases our debt investments may provide for a portion of the interest payable
to
be paid-in-kind interest. 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.
6
Equity
investments
Equity
investments may consist of preferred equity that is expected to pay dividends
on
a current basis or preferred equity that does not pay current dividends.
Preferred equity generally has a preference over common equity as to
distributions on liquidation and dividends. In some cases, we may acquire common
equity. In general, our equity investments are not control-oriented investments
and we expect that in many cases we will acquire equity securities as part
of a
group of private equity investors in which we are not the lead
investor.
Prospective
portfolio company characteristics
Our
investment adviser utilizes the disciplined investment philosophy of GSC Group’s
corporate credit group in identifying and selecting portfolio company
investments. Our portfolio companies generally have one of more of the following
characteristics:
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a
history of generating stable
earnings and strong free cash flow;
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well
constructed balance
sheets, including an
established tangible liquidation value;
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reasonable
debt-to-cash flow multiples;
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industry
leadership
with competitive advantages and
sustainable market shares in attractive sectors; and
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•
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capital
structures that provide
appropriate terms and reasonable covenants.
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Investment
selection
In
managing us, our investment adviser employs the same investment philosophy
and
portfolio management methodologies used by GSC Group’s corporate credit
group. Through this rigorous and consistent investment selection
process, based on extensive quantitative and qualitative analysis, we seek
to
identify those issuers exhibiting superior fundamental risk-reward profiles
and
strong defensible business franchises with the goal of minimizing principal
losses while maximizing risk-adjusted returns. Our investment process emphasizes
the following:
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bottoms-up,
company-specific
research and analysis;
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•
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capital
preservation, low
volatility and
minimization of downside risk; and
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•
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investing
with experienced
management
teams that hold
meaningful equity ownership in their
businesses.
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Initial
screening. A
brief analysis identifies the
investment opportunity and reviews the merits of the transaction.
The initial
screening
memorandum provides
a brief description
of
the company, its industry,
competitive position, capital structure, financials,
equity
sponsor and deal economics.
If the deal is determined
to be attractive by the
senior
members of the deal team, the
opportunity is
more fully
analyzed.
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•
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Full
analysis. A
full analysis
includes:
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7
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•
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Business
and Industry analysis — a
review
of
the
company’s
business
position, competitive
dynamics within its
industry, cost and growth drivers
and technological and geographic factors. Business
and industry research
often includes meetings with industry experts, consultants, GSC
Group advisory board
members, other investors, customers and
competitors.
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•
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Company
analysis — a
review of the company’s
historical
financial performance,
future projections, cash flow characteristics, balance sheet strength,
liquidation value,
legal, financial and accounting risks, contingent liabilities, market
share analysis and growth prospects.
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•
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Structural/security
analysis — a
thorough legal document analysis
including but not limited to an assessment of financial and
negative covenants,
events
of default, enforceability
of liens and voting
rights.
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•
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Approval
of the group
head. After
an investment has been
identified and diligence has been completed, a report is prepared.
This
report is
reviewed
by the senior
investment
professional in charge
of the potential investment. If such senior investment
professional is in
favor of the potential investment, it is presented for the
approval
of
the group head. Additional
due diligence with
respect to any investment may be conducted
by attorneys and
independent accountants prior to the closing of the investment, as
well as
by other outside advisers, as appropriate.
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•
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Approval
of the
investment committee. After
the approval of the group
head, the investment is presented
to the investment
committee for
approval. Sale
recommendations made
by
the investment staff must also
be approved by the
investment committee.
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In
addition to various risk management and monitoring tools, GSC Group normally
grades all investments using a credit and monitoring rating system (“CMR”). The
CMR rating consists of two components: (i) a numerical debt score and
(ii) a corporate letter rating. The numerical debt score is based on the
objective evaluation of six risk categories: (i) leverage,
(ii) seniority in the capital structure, (iii) fixed charge coverage
ratio, (iv) debt service coverage/liquidity, (v) operating
performance, and (vi) business/industry risk. The numerical debt score
ranges from 1.00 to 5.00, which can generally be characterized as follows:
1.00-2.00 represents assets that hold senior positions in the capital structure
and, typically, have low financial leverage and/or strong historical operating
performance; 2.00-3.00 represents assets that hold relatively senior positions
in the capital structure, either senior secured, senior unsecured, or senior
subordinate, and have moderate financial leverage and/or are performing at
or
above expectations; 3.00-4.00 represents assets that are junior in the capital
structure, have moderate financial leverage and/or are performing at or below
expectations; and 4.00-5.00 represents assets that are highly leveraged and/or
have poor operating performance. Our numerical debt score is designed to produce
higher scores for debt positions that are more subordinate in the capital
structure. Therefore, generally second lien loans, high-yield bonds and
mezzanine debt will be assigned scores of 2.25 or higher.
The
CMR
also consists of a corporate letter rating whereby each credit is assigned
a
letter rating based on several subjective criteria, including perceived
financial and operating strength and covenant compliance. The corporate letter
ratings range from (A) through (F) and are characterized as follows:
(A) equals strong credit, (B) equals satisfactory credit,
(C) equals special attention credit, (D) equals payment default risk,
(E) equals payment default, (F) equals restructured equity
security.
8
As
of May
1, 2007, the weighted average rating of the investments in our portfolio was
approximately 2.7B and the weighted average yield of such investments was
approximately 11.5%. A weighted average score of 2.7B reflects our investment
adviser’s belief that our portfolio is performing well. No asset in our
portfolio is currently in payment default or delinquent on any payment
obligations.
Investment
structure
Once
our
investment adviser determines that a prospective portfolio company is suitable
for investment, it works with the management of that company and its other
capital providers, including senior, junior, and equity capital providers,
to
structure an investment. Our investment adviser negotiates among these parties
to agree on how our investment is expected to perform relative to the other
capital in the portfolio company’s capital structure.
Our
investment adviser seeks, where appropriate, to limit the downside potential
of
our investments by:
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requiring
a total return on our
investments (including both interest and potential equity appreciation)
that compensates us for credit risk;
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•
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requiring
companies to use a
portion of their excess cash flow to repay debt;
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•
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selecting
investments with
covenants that incorporate call protection as part of the investment
structure; and
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•
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selecting
investments
with affirmative
and
negative covenants, default penalties, lien protection, change of
control
provisions and board rights, including either observation or participation
rights.
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In
general, our investment adviser intends to select investments with financial
covenants and terms that reduce leverage over time, thereby enhancing credit
quality. These methods include: (i) maintenance leverage covenants
requiring a decreasing ratio of debt to cash flow; (ii) maintenance cash
flow covenants requiring an increasing ratio of cash flow to the sum of interest
expense and capital expenditures; and (iii) debt incurrence prohibitions,
limiting a company’s ability to re-lever. In addition, limitations on asset
sales and capital expenditures should prevent a company from changing the nature
of its business or capitalization without consent.
There
may
be certain restrictions on our investment adviser’s ability to negotiate and
structure the terms of our investments when we co-invest with other GSC Group
managed investment vehicles. See “Co-investment” below.
Valuation
process
Investments
for which market quotations are readily available are recorded in our financial
statements at such market quotations. While a majority of our
portfolio is currently comprised of investments for which market quotations
are
readily available, we expect that over time, the majority of our investments
will be comprised of investments for which market quotations are not readily
available. We value investments for which market quotations are not
readily available quarterly at fair value as determined in good faith by our
board of directors based on input from our investment adviser, a third party
independent valuation firm and our audit committee. We may also be required
to
value any publicly traded investments at fair value as determined in good faith
by our board of directors to the extent necessary to reflect significant events
affecting the value of those investments. Determinations of fair
value may involve
9
subjective
judgments and estimates. The types of factors that may be considered in a fair
value pricing include the nature and realizable value of any collateral, the
portfolio company’s ability to make payments, the markets in which the portfolio
company does business, comparison to publicly traded companies, discounted
cash
flow and other relevant factors. 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 by our board of directors 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 adversely affected if the
determinations regarding the fair value of our investments were materially
higher than the values that we ultimately realize upon the disposal of such
investments.
We
undertake a multi-step valuation process each quarter when valuing investments
for which market quotations are not readily available, as described
below:
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Each
investment is
initially valued by the
responsible
investment
professionals;
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Preliminary
valuation conclusions
are documented
and discussed with our
senior management;
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An
independent valuation firm
engaged by our board of directors reviews at
least 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 an independent valuation
firm at least
annually;
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The
audit committee of our board
of directors reviews each
preliminary valuation and our
investment adviser and independent valuation firm (if applicable)
will
respond and supplement the
preliminary valuation
to reflect any comments provided by the audit
committee; and
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•
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Our
board of directors
discusses the
valuations
and
determines
the fair value of each investment
in good faith based on the input of our investment adviser, independent
valuation
firm (if
applicable) and audit
committee.
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Ongoing
relationships with and
monitoring of portfolio companies
Our
investment adviser will closely
monitor each investment the Company makes, maintain a regular dialogue with
both
the management team and
other stockholders and seek specifically tailored financial reporting.
In addition, senior
investment professionals of GSC Group
may take board seats or
board observation seats when appropriate.
Leverage
In
addition to funds available from the issuance of our common stock, we use
borrowed funds, known as “leverage,” to make investments and to attempt to
increase returns to our shareholders by reducing our overall cost of capital.
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. As of February 28, 2007, we had no outstanding
borrowings.
On
April
11, 2007, we entered into a revolving securitized credit facility (the
“Revolving Facility”) under which we may borrow up to $100 million, which amount
may be increased to $130 million subject to certain conditions. Advances under
the Revolving Facility were used to
10
purchase
$55.8 million in aggregate principal amount of debt investments from CDO Fund
III. Future advances under the Revolving Facility may be used to
purchase additional investments as they become available. The Revolving Facility
is secured by collateral that we currently own and the collateral acquired
by us
with the advances under the Revolving Facility. Under the Revolving
Facility, funds are borrowed from or through certain lenders at prevailing
commercial paper rates or, if the commercial paper market is at any time
unavailable, at prevailing LIBOR rates, plus 0.70% payable monthly.
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 to purchase $59.3 million in aggregate
principal amount of debt investments from CDO Fund I. The Term
Facility bears interest at prevailing commercial paper rates or, if the
commercial paper market is at any time unavailable, at prevailing LIBOR rates,
plus 0.70%, payable quarterly.
Each
of
the Facilities contain limitations as to how borrowed funds may be used, such
as
restrictions on geographic and industry concentrations, asset size, payment
frequency and status, average life, collateral interests and investment
ratings. In addition, our financing relies on Rule 3a-7 under the
1940 Act which prohibits us from, among other things, directing either of the
Facilities to acquire, or dispose of investments for the primary purpose of
recognizing gains or decreasing losses resulting from market value changes,
which our investment advisor may otherwise do absent such
restrictions. We are also subject to regulatory restrictions on
leverage which may affect the amount of funding that we can obtain under the
Facilities. The Facilities also includes certain requirements relating to
portfolio performance the violation of which could result in the early
amortization of the Facilities, limit further advances (in the case of the
Revolving Facility) and, in some cases, result in an event of
default.
In
the
interests of diversifying
our sources of debt funding, we may in the future borrow from and issue senior
debt securities to banks and other lenders and/or securitize certain of our
portfolio investments, subject to our ability to satisfy the 1940 Act
restrictions on BDCs.
Portfolio
management
policies
GSC
Group
has designed a compliance program to monitor its conflict-resolution policies
and procedures and regularly evaluates the reasonableness of such policies
and
procedures. GSC Group’s compliance program monitors the implementation of and
tests adherence to compliance-related policies and procedures that address
GSC
Group’s Code of Ethics and other compliance matters including investment
allocation, trade aggregation, best execution, cross trades and proxy voting
and
related matters. The program is governed in part by the requirements of the
1940
Act and is headed by GSC Group’s Chief Compliance Officer. GSC Group has also
established a Compliance Committee consisting of GSC Group’s Chief Compliance
Officer, Associate General Counsel, Compliance (who also serves as our chief
compliance officer) and a Senior Managing Director that provides day-to-day
guidance on GSC Group compliance matters in addition to overseeing the
compliance program.
Managerial assistance
As
a BDC
we offer, and must provide upon request, managerial assistance to our portfolio
companies. This assistance could involve, among other things, monitoring the
operations of our portfolio companies, participating in board and management
meetings, consulting with and advising officers of portfolio companies and
providing other organizational and financial guidance. Pursuant to a separate
administration agreement, our investment adviser (to the extent permitted under
the 1940 Act) will provide such managerial assistance on our behalf to portfolio
companies
11
that
request this assistance, recognizing that our involvement with each investment
will vary based on factors including the size of the company, the nature of
our
investment, the company’s overall stage of development and our relative position
in the capital structure. We may receive fees for these services.
Competition
Our
primary competitors in providing financing to private middle market companies
include public and private investment funds, commercial and investment banks
and
commercial financing companies. Many of our competitors are substantially larger
and have considerably greater financial and marketing resources than us. For
example, some competitors may have access to funding sources that are not
available to us. In addition, some of our competitors may have higher risk
tolerances or different risk assessments, that may allow them to consider a
wider variety of investments. Furthermore, many of our competitors are not
subject to the regulatory restrictions that the 1940 Act imposes on us as a
BDC.
We expect to use GSC Group’s knowledge and resources to learn about, and compete
effectively for, financing opportunities with attractive private middle market
companies in the industries in which we seek to invest. For additional
information concerning the competitive risks we face, see “Risk Factors —
Risks related to our business — We operate in a highly competitive market
for investment opportunities.”
Staffing
We
do not
currently have any employees and do not expect to have any employees in the
future. Services necessary for our business will be provided by individuals
who
are employees of GSC Group, pursuant to the terms of the investment advisory
and
management agreement and the administration agreement. We reimburse GSC Group
for our allocable portion of expenses incurred by it in performing its
obligations under the administration agreement, including rent and our allocable
portion of the cost of our officers and their respective staffs, subject to
certain limitations.
Regulation
We
have
elected to be treated as a BDC under the 1940 Act. As with other companies
regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory
requirements. The 1940 Act contains prohibitions and restrictions relating
to
transactions between BDCs and their affiliates (including any investment
advisers or sub-advisers), principal underwriters and affiliates of those
affiliates or underwriters, and requires that a majority of the directors be
persons other than “interested persons,” as that term is defined in the 1940
Act. In addition, the 1940 Act provides that we may not change the nature of
our
business so as to cease to be, or to withdraw our election as, a BDC, unless
approved by a majority of our outstanding voting securities. A majority of
the
outstanding voting securities of a company is defined under the 1940 Act as
the
lesser of: (i) 67% or more of such company’s stock present at a meeting if
more than 50% of the outstanding stock of such company are present and
represented by proxy or (ii) more than 50% of the outstanding stock of such
company.
Under
the
1940 Act, we may invest up to 100% of our assets in securities acquired directly
from issuers in privately negotiated transactions. With respect to such
securities, we may, for the purpose of public resale, be deemed a “principal
underwriter” as that term is defined in the Securities Act.
Our
intention is to not write (sell) or buy put or call options to manage risks
associated with the publicly traded securities of our portfolio companies,
except that we may enter into hedging transactions to manage the risks
associated with interest rate fluctuations. However, we
12
may
purchase or otherwise receive warrants to purchase the common stock of our
portfolio companies in connection with acquisition financing or other
investment. Similarly, in connection with an acquisition, we may acquire rights
to require the issuers of acquired securities or their affiliates to repurchase
them under certain circumstances.
We
also do
not intend to acquire securities issued by any investment company that exceed
the limits imposed by the 1940 Act. Under these limits, we generally cannot
acquire more than 3% of the voting stock of any registered investment company,
invest more than 5% of the value of our total assets in the securities of one
investment company or invest more than 10% of the value of our total assets
in
the securities of investment companies in general. With regard to that portion
of our portfolio invested in securities issued by investment companies, it
should be noted that such investments might subject our stockholders to
additional expenses. None of these policies are fundamental and may be changed
without stockholder approval.
Qualifying
assets
Under
the
1940 Act, a BDC may not acquire any asset other than assets of the type listed
in Section 55(a) of the 1940 Act, which are referred to as qualifying
assets, unless, at the time the acquisition is made, qualifying assets represent
at least 70% of the company’s total assets. The principal categories of
qualifying assets relevant to our proposed business are the
following:
(1) Securities
purchased in transactions not involving any public offering from the issuer
of
such securities, which issuer (subject to certain limited exceptions) is an
eligible portfolio company, or from any person who is, or has been during the
preceding 13 months, an affiliated person of an eligible portfolio company,
or from any other person, subject to such rules as may be prescribed by the
SEC.
An eligible portfolio company is defined in the 1940 Act as any issuer
which:
(a) is
organized under the laws of, and has its principal place of business in, the
United States;
(b) is
not an investment company (other than a small business investment company wholly
owned by the BDC) or a company that would be an investment company but for
certain exclusions under the 1940 Act; and
(c) satisfies
either of the following:
(i) does
not have any class of securities listed on a national securities
exchange; or
(ii) is
controlled by a BDC or a group of companies including a BDC, and the BDC
actually exercises a controlling influence over the management or policies
of
the eligible portfolio company, and, as a result thereof, the BDC has an
affiliated person who is a director of the eligible portfolio
company.
(2) Securities
of any eligible portfolio company which we control.
(3) Securities
purchased in a private transaction from a U.S. issuer that is not an
investment company or from an affiliated person of the issuer, or in
transactions incident thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the purchase of its
securities was unable to meet its obligations as they came due without material
assistance other than conventional lending or financing
arrangements.
13
(4) Securities
of an eligible portfolio company purchased from any person in a private
transaction if there is no ready market for such securities and we already
own
at least 60% of the outstanding equity of the eligible portfolio
company.
(5) Securities
received in exchange for or distributed on or with respect to securities
described in (1) through (4) above, or pursuant to the exercise of
options, warrants or rights relating to such securities.
(6) Cash,
cash equivalents, U.S. Government securities or high-quality debt
securities maturing in one year or less from the time of
investment.
Managerial
assistance to portfolio companies
In
addition, a BDC must have been organized and have its principal place of
business in the United States and must be operated for the purpose of making
investments in the types of securities described in (1), (2) or
(3) above under “— Qualifying assets.” However, in order to count
portfolio securities as qualifying assets for the purpose of the 70% test,
the
BDC must either control the issuer of the securities or must offer to make
available to the issuer of the securities (other than small and solvent
companies described above) significant managerial assistance; except that,
where
the BDC purchases such securities in conjunction with one or more other persons
acting together, one of the other persons in the group may make available such
managerial assistance. Making available significant managerial assistance means,
among other things, any arrangement whereby the BDC, through its directors,
officers or employees, offers to provide, and, if accepted, does so provide,
significant guidance and counsel concerning the management, operations or
business objectives and policies of a portfolio company.
Temporary
investments
As
a BDC,
pending investment in other types of “qualifying assets,” as described above,
our investments may consist of cash, cash equivalents, U.S. Government
securities or high-quality debt securities maturing in one year or less from
the
time of investment, which we refer to, collectively, as temporary investments,
so that 70% of our assets are qualifying assets. Typically, we will invest
in
U.S. Treasury bills or in repurchase agreements, provided that such
agreements are fully collateralized by cash or securities issued by the
U.S. Government or its agencies. A repurchase agreement involves the
purchase by an investor, such as us, of a specified security and the
simultaneous agreement by the seller to repurchase it at an agreed-upon future
date and at a price which is greater than the purchase price by an amount that
reflects an agreed-upon interest rate. There is no percentage restriction on
the
proportion of our assets that may be invested in such repurchase agreements.
However, if more than 25% of our total assets constitute repurchase agreements
from a single counterparty, we would not meet the asset diversification
requirements in order to qualify as a RIC for U.S. federal income tax
purposes. Thus, we do not intend to enter into repurchase agreements with a
single counterparty in excess of this limit. Our investment adviser will monitor
the creditworthiness of the counterparties with which we enter into repurchase
agreement transactions.
Indebtedness
and senior securities
As
a BDC,
we are permitted, under specified conditions, to issue multiple classes of
indebtedness and one class of shares of stock senior to our common stock if
our
asset coverage, as defined in the 1940 Act, is at least equal to 200%
immediately after each such issuance. In addition, while any indebtedness and
senior securities remain outstanding, we must make provisions to prohibit any
distribution to our stockholders or the repurchase of such securities or stock
unless we meet the applicable asset coverage ratios at the time of the
distribution or
14
repurchase.
We may also borrow amounts up to 5% of the value of our total assets for
temporary or emergency purposes without regard to asset coverage. For a
discussion of the risks associated with leverage, see “Risk factors — Risks
related to our operation as a BDC — Regulations governing our operation as
a BDC will affect our ability to, and the way in which we, raise additional
capital.”
Code
of ethics
As
a BDC,
we and our investment adviser have each adopted a code of ethics pursuant to
Rule 17j-1 under the 1940 Act that establishes procedures for personal
investments and restricts certain personal securities transactions. Personnel
subject to each code may invest in securities for their personal investment
accounts, including securities that may be purchased or held by us, so long
as
such investments are made in accordance with the code’s
requirements.
Proxy
voting policies and procedures
SEC
registered investment advisers that have the authority to vote (client) proxies
(which authority may be implied from a general grant of investment discretion)
are required to adopt policies and procedures reasonably designed to ensure
that
the adviser votes proxies in the best interests of its clients. Registered
investment advisers also must maintain certain records on proxy voting. In
most
cases, we will invest in securities that do not generally entitle us to voting
rights in its portfolio companies. When we do have voting rights, we will
delegate the exercise of such rights to our investment adviser.
Our
investment adviser has particular proxy voting policies and procedures in place.
In determining how to vote, officers of our investment adviser will consult
with
each other and other investment professionals of GSC Group, taking into account
our interests and the interests of our investors, as well as any potential
conflicts of interest. Our investment adviser will consult with legal counsel
to
identify potential conflicts of interest. Where a potential conflict of interest
exists, our investment adviser may, if it so elects, resolve it by following
the
recommendation of a disinterested third party, by seeking the direction of
our
independent directors or, in extreme cases, by abstaining from voting. While
our
investment adviser may retain an outside service to provide voting
recommendations and to assist in analyzing votes, our investment adviser will
not delegate its voting authority to any third party.
An
officer
of our investment adviser will keep a written record of how all such proxies
are
voted. Our investment adviser will retain records of (1) proxy voting
policies and procedures, (2) all proxy statements received (or it may rely
on proxy statements filed on the SEC’s EDGAR system in lieu thereof),
(3) all votes cast, (4) investor requests for voting information, and
(5) any specific documents prepared or received in connection with a
decision on a proxy vote. If it uses an outside service, our investment adviser
may rely on such service to maintain copies of proxy statements and records,
so
long as such service will provide a copy of such documents promptly upon
request.
Our
investment adviser’s proxy voting policies are not exhaustive and are designed
to be responsive to the wide range of issues that may be subject to a proxy
vote. In general, our investment adviser will vote our proxies in accordance
with these guidelines unless: (1) it has determined otherwise due to the
specific and unusual facts and circumstances with respect to a particular vote,
(2) the subject matter of the vote is not covered by these guidelines,
(3) a material conflict of interest is present, or (4) it finds it
necessary to vote contrary to its general guidelines to maximize stockholder
value or our best interests.
15
In
reviewing proxy issues, our investment adviser generally will use the following
guidelines:
Elections
of Directors: In general, our investment adviser will
vote in favor of the management- proposed slate of directors. If there is a
proxy fight for seats on a portfolio company’s board of directors, or our
investment adviser determines that there are other compelling reasons for
withholding our vote, it will determine the appropriate vote on the matter.
We
may withhold votes for directors that fail to act on key issues, such as failure
to: (1) implement proposals to declassify a board, (2) implement a
majority vote requirement, (3) submit a rights plan to a stockholder vote
or (4) act on tender offers where a majority of stockholders have tendered
their shares. Finally, our investment adviser may withhold votes for directors
of non-U.S. issuers where there is insufficient information about the
nominees disclosed in the proxy statement.
Appointment
of Auditors: We believe that a portfolio company
remains in the best position to choose its independent auditors and our
investment adviser will generally support management’s recommendation in this
regard.
Changes
in Capital Structure: Changes in a portfolio company’s
organizational documents may be required by state or federal regulation. In
general, our investment adviser will cast our votes in accordance with the
management on such proposals. However, our investment adviser will consider
carefully any proposal regarding a change in corporate structure that is not
required by state or federal regulation.
Corporate
Restructurings, Mergers and Acquisitions: We believe
proxy votes dealing with corporate reorganizations are an extension of the
investment decision. Accordingly, our investment adviser will analyze such
proposals on a case-by-case basis and vote in accordance with its perception
of
our interests.
Proposals Affecting
Stockholder Rights: We will generally vote in favor of
proposals that give stockholders a greater voice in the affairs of a portfolio
company and oppose any measure that seeks to limit such rights. However, when
analyzing such proposals, our investment adviser will balance the financial
impact of the proposal against any impairment of stockholder rights as well
as
of our investment in the portfolio company.
Corporate
Governance: We recognize the importance of good
corporate governance. Accordingly, our investment adviser will generally favor
proposals that promote transparency and accountability within a portfolio
company.
Anti-Takeover
Measures: Our investment adviser will evaluate, on a
case-by-case basis, any proposals regarding anti-takeover measures to determine
the measure’s likely effect on stockholder value dilution.
Share
Splits: Our investment adviser will generally vote with
management on share split matters.
Limited
Liability of Directors: Our investment adviser will
generally vote with management on matters that could adversely affect the
limited liability of directors.
Social
and Corporate Responsibility: Our investment adviser
will review proposals related to social, political and environmental issues
to
determine whether they may adversely affect stockholder value. Our investment
adviser may abstain from voting on such proposals where they do not have a
readily determinable financial impact on stockholder value.
16
Privacy
principles
We
are committed to maintaining the
privacy of our stockholders
and to safeguarding their non-public personal information. The following
information is provided to help you understand what personal information
we
collect, how we protect that information and why, in certain cases, we may
share
information with select
other
parties.
Generally,
we do not receive any
non-public personal information relating to our stockholders, although certain
non-public personal information of our stockholders may become available
to us.
We do not disclose any non-public personal information about our
stockholders or
former stockholders to anyone, except as permitted by law or as is necessary
in
order to service stockholder accounts (for example, to a transfer agent or
third
party administrator).
We
restrict access to non-public
personal information
about
our stockholders to employees of our investment adviser and its affiliates
with
a legitimate business need for the information. We maintain physical, electronic
and procedural safeguards designed to protect the non-public personal
information of our
stockholders.
Other
As
a BDC, we are
periodically examined by the SEC for
compliance with the 1940 Act. Our manager is a
Registered Investment Advisor
and is also subject to examination by the
SEC.
We
will be required to provide
and maintain a bond
issued
by a reputable fidelity insurance company to protect us against larceny and
embezzlement. Furthermore, as a BDC, we are prohibited from protecting any
director or officer against any liability to us or our stockholders arising
from
willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
such
person’s
office.
We
and our investment adviser are each
required to adopt and implement written policies and procedures reasonably
designed to prevent
violation of the federal securities laws, review these policies and procedures
annually for their adequacy and the effectiveness of their implementation,
and
designate a chief compliance officer to be responsible for administering
the
policies
and
procedures.
Co-investment
As
a BDC, we are prohibited under the
1940 Act from knowingly participating in certain transactions with our
affiliates without the prior approval of our independent directors, or in
some
cases, the prior approval of the SEC. For example,
any person that
owns, directly or indirectly, 5% or more of our outstanding voting securities
is our
affiliate for purposes of the 1940 Act
and we
are generally
prohibited from buying or selling any
security from or to such affiliate, absent the prior approval
of our
independent directors. The 1940 Act also prohibits “joint”
transactions with an affiliate, which
could include investments in the same portfolio company (whether at the same
or
different times), without prior approval of our
independent directors and, in some
cases, the SEC. If a person acquires more than 25% of our voting securities,
we
are prohibited from buying or selling any security from or to such person,
or
entering into joint transactions with such person, absent the
prior approval of the SEC. Similar
restrictions limit our ability to transact business with our officers or
directors or their affiliates. As a result, we will be limited in our ability
to
negotiating the term of any investment (except with respect to price)
in instances where we are
participating in such investments with other funds managed by GSC Group. Generally,
we are prohibited from knowingly
making an
investment in securities of a portfolio company that is already held by GSC
Group or any other fund
managed by GSC Group. However, if a portfolio
17
company
offers additional securities and
existing securities are held by us and GSC Group or other funds managed by
GSC
Group, then we may participate in a follow-on investment in such securities
on a
pro-rata
basis.
The
Company and GSC Group may in the
future submit an exemptive application to the SEC to permit greater flexibility
to negotiate the terms of co-investments because we believe that it will
be
advantageous for the Company to co-invest with funds managed by GSC Group
where such
investment is consistent with the investment objectives, investment positions,
investment policies, investment strategies, investment restrictions, regulatory
requirements and other pertinent factors applicable to the Company.
We believe that co-investment by the
Company and funds managed by GSC Group may afford the Company additional
investment opportunities and the ability to achieve greater diversification.
Accordingly, any application would seek an exemptive order permitting
the Company to negotiate more than
price terms when investing with funds managed by GSC Group in the same portfolio
companies. It is expected that any exemptive relief permitting co-investments
on
those terms would be granted, if at all, only upon the conditions,
among others, that before
such a co-investment transaction is effected, our investment adviser will
make a
written investment presentation regarding the proposed co-investment to the
independent directors of the Company and the independent directors
of the Company will review our
investment adviser’s
recommendation.
Moreover,
it is expected that prior to
committing to a co-investment, a “required majority”
(as defined in Section 57(o) of
the 1940 Act) of the independent directors of the Company would conclude that
(i) the terms
of the proposed transaction are reasonable and fair to the Company and its
stockholders and do not involve overreaching of the Company and its stockholders
on the part of any person concerned; (ii) the transaction is
consistent
with the interests of the
stockholders of the Company and is consistent with the investment objectives
and
policies of the Company; and (iii) the co-investment by any GSC Group fund
would not disadvantage the Company in making its investment, maintaining
its investment position, or
disposing of such investment and that participation by the Company would
not be
on a basis different from or less advantageous than that of the affiliated
co-investor. There is no assurance that the application for exemptive
relief will be granted by the SEC or
that, if granted, it will be on the terms set forth
above.
Resolution
of potential conflicts of
interest; equitable allocation of investment
opportunities
Subject
to
the 1940 Act restrictions on co-investments with affiliates, GSC Group will
offer us the right to participate in all investment opportunities that it
determines are appropriate for us in view of our investment objectives, policies
and strategies and other relevant factors, subject to the exception that, in
accordance with GSC Group’s conflict of interest and allocation policies, we
might not participate in each individual opportunity but are, on an overall
basis, entitled to equitably participate with GSC Group’s other funds or other
clients.
We
are GSC Group’s
principal investment vehicle for
non-distressed second lien loans and mezzanine debt of U.S. middle
market entities. Although
existing and future investment vehicles managed or to be managed by GSC Group
invest or may invest in mezzanine loans and second
lien loans, none of these
investment vehicles target non-distressed domestic second lien and mezzanine
loans as the core of their portfolios. For example, while funds managed by
GSC
Group’s
equity and distressed debt group may
purchase second lien loans
and mezzanine debt of private
middle market companies, these funds
will typically be interested in these assets in distressed situations, whereas
we generally will seek to hold performing debt. Likewise, while funds managed
by
GSC Group’s
real estate group
may purchase second lien loans and
mezzanine debt as an aspect of their investment strategies, these funds are
largely focused on asset-backed and mortgage-backed loans and debt, not on
corporate debt of the type we target. Finally, due to the high amounts
of leverage deployed by various
CDO funds managed by GSC Group, these
18
funds
tend to target first lien loans,
while second lien and mezzanine loans are a secondary part of the
strategy.
To
the extent that we do compete with
any of GSC Group’s
clients for a particular investment
opportunity,
our investment adviser will allocate the investment opportunity across the
funds
for which the investment is appropriate based on its internal conflict of
interest and allocation policies consistent with the requirements
of the Advisers Act, subject
further to the 1940 Act restrictions on co-investments with affiliates and
also
giving effect to priorities that may be enjoyed from to time to time by one
or
more funds based on their investment mandate or guidelines, or
any right of first review agreed to
from time to time by GSC Group. Currently, GSC European Mezzanine Fund II,
L.P. has a priority on investments in mezzanine securities of issuers located
primarily in Europe.
In addition, GSC Acquisition Company
has recently
entered into a business opportunity
right of first review agreement which provides that it will have a right of
first review prior to any other fund managed by GSC Group with respect to
business combination opportunities with an enterprise value of $175 million
or more until the
earlier of it consummating an initial business combination or its liquidation.
Subject to the foregoing, GSC Group’s
allocation policies are intended to
ensure that we may generally share equitably with other GSC
Group-managed investment
vehicles in investment
opportunities, particularly those involving a security with limited supply
or
involving differing classes of securities of the same issuer, that may be
suitable for us and such other investment vehicles.
GSC
Group has historically managed investment
vehicles
with similar or overlapping investment strategies and has a conflict-resolution
policy in place that will also address the co- investment restrictions under
the
1940 Act. The policy is intended to ensure that we comply with
the 1940 Act restrictions on
transactions with affiliates. These restrictions will significantly impact
our
ability to co-invest with other GSC Group’s
funds. While the 1940 Act generally
prohibits all “joint
transactions” between
entities that share a
common investment adviser, the staff
of the SEC has granted no-action relief to an investment adviser permitting
purchases of a single class of privately-placed securities, provided that the
investment adviser negotiates no term other than price and certain
other conditions are satisfied.
Neither our investment adviser nor any participant in a co-investment will
have
both a material pecuniary incentive and ability to cause us to participate
with
it in a co-investment. As a result, we only expect to co-invest
on a concurrent basis with GSC
Group’s
funds when each fund will own the same
securities of the issuer. If opportunities arise that would otherwise be
appropriate for us and for one or more of GSC Group’s
other funds to invest in different
securities of
the same issuer, our investment
adviser will need to decide whether we or the other funds will proceed with
the
investment.
GSC
Group’s
allocation procedures are designed to
allocate investment opportunities among the investment vehicles of GSC Group
in
a manner consistent with
its obligations under the Advisers Act. If two or more investment vehicles
with
similar investment strategies are still in their investment periods, an
available investment opportunity will be allocated as described below,
subject to
any provisions governing allocations
of investment opportunities in the relevant organizational documents. As an
initial step, our investment adviser will determine whether a particular
investment opportunity is an appropriate investment for us and its other
clients and typically will
determine the amount that would be appropriate for each client by considering,
among other things, the following criteria: (1) the investment guidelines
and/or restrictions set forth in the applicable organizational
documents;
(2) the risk and return profile
of the client entity; (3) the suitability/priority of a particular
investment for the client entity; (4) if applicable, the target position
size of the investment for the client entity; and (5) the level of
available cash
for investment with respect to the
particular client entity. If there is an insufficient amount of an opportunity
to satisfy the needs of all participants, the investment opportunity will
generally be allocated pro-rata based on the initial investment amounts.
See “Risk Factors —
There are
19
conflicts
of interest in our
relationship with our investment adviser and/or GSC Group, which could result
in
decisions that are not in the best interests of our
stockholders.”
Compliance
with the Sarbanes-Oxley Act
and the New
York Stock Exchange corporate
governance
regulations
The
Sarbanes-Oxley Act of
2002 (the “Sarbanes-Oxley
Act”)
imposes a wide variety of new
regulatory requirements on publicly-held companies and their insiders. The
Sarbanes-Oxley Act requires
us to review our policies and
procedures to determine whether we comply with the Sarbanes-Oxley Act and
the
new regulations promulgated thereunder. We will continue to monitor our
compliance with all future regulations that are adopted under the
Sarbanes-Oxley
Act and will take actions
necessary to ensure that we are in compliance
therewith.
In
addition, the New York Stock Exchange
adopted corporate governance changes to its listing standards in 2003. We
believe we are in compliance with such corporate governance listing standards.
We will
continue to monitor our compliance with all future listing standards and
will
take actions necessary to ensure that we are in compliance
therewith.
Available
Information
We
file
with or submit to the SEC annual, quarterly and current periodic reports, proxy
statements and other information meeting the informational requirements of
the
Securities Exchange of 1934, as amended (the “Exchange Act”). You may inspect
and copy these reports, proxy statements and other information at the Public
Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. Copies of these reports, proxy and
information statements and other information may be obtained, after paying
a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the SEC’s Public Reference Section,
Washington, D.C. 20549-0102. In addition, the SEC maintains an Internet
website that contains reports, proxy and information statements and other
information filed electronically by us with the SEC at
http://www.sec.gov.
20
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Item 1A.
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Risk
Factors
|
Investing
in our common stock involves a high degree of risk. The risks set forth below
are not the only risks we face. If any of the following risks occur, our
business and financial condition could be materially adversely affected. In
such
case, our net asset value and the trading price of our common stock could
decline.
Risks
related to our
business
We
are a newly-incorporated Maryland
corporation with no operating
history.
We
were incorporated in March 2007
and commenced our operations
that same
month. We are subject to
all of the business risks and uncertainties associated with any new
business, including
the risk that we may
not achieve our investment objectives
and that the value of your investment could decline
substantially.
We
may not be able to replicate GSC
Group’s
historical
performance.
Our
primary focus in making investments differs from those of other private funds
that are or have been managed by GSC Group’s investment professionals. Further,
our investors are not acquiring an interest in other GSC Group
funds. Accordingly, we cannot assure you that we will replicate GSC
Group’s historical performance, and we caution you that our investment returns
could be substantially lower than the returns achieved by other GSC Group
funds.
We
may compete with investment vehicles
of GSC Group for access to GSC Group.
Our
investment adviser and its affiliates have sponsored and currently manage other
investment vehicles with an investment focus that overlaps with our focus,
and
may in the future sponsor or manage additional investment vehicles with an
overlapping focus to ours, which, in each case, could result in us competing
for
access to the benefits that we expect our relationship with GSC Group to provide
to us.
We
are dependent upon our investment
adviser’s
key personnel for our future success
and upon their access to GSC Group’s investment
professionals.
We
depend
on the diligence, skill and network of business contacts of GSC Group’s
investment professionals and the information and deal flow generated by them
in
the course of their investment and portfolio management activities. The
departure of a significant number of the investment professionals of GSC Group,
could have a material adverse effect on our ability to achieve our investment
objectives. In addition, we cannot assure you that our investment adviser will
remain our investment adviser or that we will continue to have access to GSC
Group’s investment professionals or its information and deal flow.
Our
financial condition and results of operation depends on our ability to manage
future growth effectively.
Our
ability to achieve our investment objectives depends on our ability to acquire
suitable investments and monitor and administer those investments, which
depends, in turn, on our investment adviser’s ability to identify, invest in and
monitor companies that meet our investment criteria.
21
Accomplishing
this result on a cost-effective basis is largely a function of our investment
adviser’s structuring of the investment process and its ability to provide
competent, attentive and efficient service to us. Our executive officers and
the
employees of our investment adviser have substantial responsibilities in
connection with their roles at GSC Group and with the other GSC Group investment
vehicles as well as responsibilities under the investment advisory and
management agreement. They may also be called upon to provide managerial
assistance to our portfolio companies. These demands on their time, which will
increase as the number of investments grow, may distract them or slow the rate
of investment. In order to grow, our investment adviser may need to hire, train,
supervise and manage new employees. However, we cannot assure you that any
such
employees will contribute to the work of the investment adviser. Any failure
to
manage our future growth effectively could have a material adverse effect on
our
business and financial condition.
Our
ability to grow will depend on our ability to raise
capital.
We
will
need to periodically access the capital markets to raise cash to fund new
investments. Unfavorable economic conditions could increase our funding costs,
limit our access to the capital markets or result in a decision by lenders
not
to extend credit to us. An inability to successfully access the capital markets
could limit our ability to grow our business and fully execute our business
strategy and could decrease our earnings, if any.
We
employ leverage.
We
currently use our Facilities to leverage our portfolio and we expect in the
future to borrow from and issue senior debt securities to banks and other
lenders and may securitize certain of our portfolio investments.
With
certain limited exceptions, as a BDC we are only allowed to borrow amounts
such
that our asset coverage, as defined in the 1940 Act, is at least 200% after
such
borrowing. The amount of leverage that we employ will depend on our investment
adviser’s and our board of directors’ assessment of market conditions and other
factors at the time of any proposed borrowing. There is no assurance that a
leveraging strategy will be successful. Leverage involves risks and special
considerations for stockholders, including:
|
|
•
|
A
likelihood
of greater volatility
in the net
asset value and market price
of our common stock.
|
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||
|
|
•
|
Diminished
operating
flexibility as a result
of asset coverage
or investment
portfolio composition
requirements that are more stringent than those imposed by the 1940
Act. In
addition, our financing subsidiaries rely on Rule 3a-7 under the
1940 Act,
which prohibits us from, among other things, directing either of
our
financing subsidiaries to acquire, or dispose of investments for
the
primary purpose of recognizing gains or decreasing losses resulting
from
market value changes.
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||
|
•
|
The
possibility that investments
will have to be liquidated at less than full value or at
inopportune times
to
comply with debt covenants.
|
|
|
|
•
|
Increased
operating expenses due
to the cost of
leverage, including issuance and servicing
costs.
|
|
|
•
|
Subordination
to Lenders’
superior claims on
our assets as a result
of which lenders
will be able to
receive proceeds available in the case of our liquidation before
any
proceeds are distributed to our
shareholders.
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22
Any
requirement that we sell assets at a loss to redeem or pay interest or dividends
on any leverage or for other reasons would reduce our net asset value and also
make it difficult for the net asset value to recover. Our investment adviser
and
our board of directors in their best judgment nevertheless may determine to
use
leverage if they expect that the benefits to our stockholders of maintaining
the
leveraged position will outweigh the risks.
Our
investment adviser’s base compensation may cause it to increase our leverage
contrary to our interest.
We
pay the
investment adviser a quarterly base management fee based on the value of our
total assets (including any assets acquired with leverage). Accordingly, the
investment adviser has an economic incentive to increase our leverage. Our
board
of directors monitors the conflicts presented by this compensation structure
by
approving the amount of leverage that we incur. If our leverage is increased,
we
will be exposed to increased risk of loss, bear the increase cost of issuing
and
servicing such senior indebtedness, and will be subject to any additional
covenant restrictions imposed on us in an indenture or other instrument or
by
the applicable lender.
Our
investment adviser’s incentive compensation may cause it to pursue a high risk
investment strategy.
The
incentive fee payable to the investment adviser may create an incentive for
the
investment adviser to make investments that are riskier or more speculative
than
would be the case in the absence of such compensation arrangement. The way
in
which the incentive fee payable to the investment adviser is determined, which
is calculated as a percentage of the return on net assets, may encourage the
investment adviser to use leverage to increase the return to the Company’s
investments. If the investment adviser acquires poorly-performing assets with
such leverage, the loss to holders of the shares could be substantial. Moreover,
if our leverage is increased, we will be exposed to increased risk of loss,
bear
the increased cost of issuing and servicing such senior indebtedness, and will
be subject to any additional covenant restrictions imposed on us in an indenture
or other instrument or by the applicable lender. Our board of directors will
monitor the conflicts presented by this compensation structure by approving
the
amount of leverage that we may incur. In addition, the investment
adviser receives the incentive fee based, in part, upon net capital gains
realized on our investments. Unlike the portion of the incentive fee based
on
income, there is no hurdle rate applicable to the portion of the incentive
fee
based on net capital gains. As a result, the investment adviser may have a
tendency to invest more in investments that are likely to result in capital
gains as compared to income producing securities. Such a practice could result
in our investing in more speculative securities than would otherwise be the
case, which could result in higher investment losses, particularly during
economic downturns.
We
are exposed to risks associated with changes in interest
rates.
General
interest rate fluctuations and changes in credit spreads on floating rate loans
may have a substantial negative impact on our investments and investment
opportunities and, accordingly, may have a material adverse effect on investment
objectives and our rate of return on invested capital. In addition, an increase
in interest rates would make it more expensive to use debt to finance our
investments. Decreases in credit spreads on debt that pays a floating rate
of
return would have an impact on the income generation of our floating rate
assets. Trading prices for debt that pays a fixed rate of return tend to fall
as
interest rates rise. Trading prices tend to fluctuate more for fixed-rate
securities that have longer maturities. Although we have no policy governing
the
maturities of our investments, under current market conditions we expect that
we
will invest in a portfolio of debt generally having maturities of up to ten
years. This means that we will be
23
subject
to
greater risk (other things being equal) than an entity investing solely in
shorter-term securities. A decline in the prices of the debt we own could
adversely affect the trading price of our common stock.
Many
of our portfolio investments are recorded at fair value as determined in good
faith by our board of directors. As a result, there is uncertainty as to the
value of our portfolio investments.
We
expect
that, over time, a large percentage of our portfolio will be comprised of
investments that are not publicly traded. The fair value of investments that
are
not publicly traded may not be readily determinable. We value these investments
quarterly at fair value as determined in good faith by our board of directors.
However, we may be required to value our investments more frequently as
determined in good faith by our board of directors to the extent necessary
to
reflect significant events affecting their value. Where appropriate, our board
of directors may utilize the services of an independent valuation firm to aid
it
in determining fair value. The types of factors that may be considered in
valuing our investments include the nature and realizable value of any
collateral, the portfolio company’s ability to make payments and its earnings,
the markets in which the portfolio company does business, comparison to publicly
traded companies, discounted cash flow and other relevant factors. Because
such
valuations, and particularly valuations of private investments and private
companies, are inherently uncertain, may fluctuate over short periods of time
and may be based on estimates, our determinations 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 adversely affected if our
determinations regarding the fair value of our investments are materially higher
than the values that we ultimately realize upon the sale of our
investments.
We
may experience fluctuations in our quarterly results.
We
could
experience fluctuations in our quarterly operating results due to a number
of
factors, including the interest rate payable on the debt investments we make,
the default rate on such investments, the level of our expenses, variations
in
and the timing of the recognition of realized and unrealized gains or losses,
the degree to which we encounter competition in our markets and general economic
conditions. As a result of these factors, results for any period should not
be
relied upon as being indicative of performance in future periods.
There
are conflicts of interest in our relationship with our investment adviser and/or
GSC Group, which could result in decisions that are not in the best interests
of
our stockholders.
Subject
to
the restrictions of the 1940 Act, we may co-invest in investments of portfolio
companies on a concurrent basis with other investment vehicles managed by GSC
Group. Similarly a GSC Group managed investment vehicle may, in certain
circumstances, invest in securities issued by a company in which we have made,
or are making, an investment. Although certain such investments may present
conflicts of interest, we nonetheless may pursue and consummate such
transactions. These conflicts may include:
Co-Investment. We
are prohibited from co-investing with other investment vehicles managed now
or
in the future by GSC Group in certain investments of portfolio companies in
instances where GSC Group negotiates terms other than price. In instances where
we co-invest with a GSC Group managed investment vehicle, while we will invest
on the same terms and neither we nor the GSC Group managed investment vehicle
may negotiate terms of the transaction other than price, conflicts of interest
may arise. For example, if an investee company in which both we and a GSC Group
managed investment vehicle have invested becomes distressed, and if
24
the
size
of our relative investments vary significantly, the decisions relating to
actions to be taken could raise conflicts of interest.
Conflicts
in Different Parts of Capital Structure. If a portfolio
company in which we and another GSC Group managed investment vehicle hold
different classes of securities encounters financial problems, decisions over
the terms of any workout will raise conflicts of interests. For example, a
debt
holder may be better served by a liquidation of the issuer in which it will
be
paid in full, whereas an equity holder might prefer a reorganization that could
create value for the equity holder.
Potential
Conflicting Positions. Given our investment objectives
and the investment objectives of other GSC Group managed investment vehicles,
it
is possible that we may hold a position that is contrary to a position held
by
another GSC Group managed investment vehicle. For example, we could hold a
longer term investment in a certain portfolio company and at the same time
another GSC Group managed investment vehicle could hold a short term position
in
the same company. The GSC Group makes each investment decision separately based
upon the investment objective of each of its clients.
Shared
Legal Counsel. We and a GSC Group managed investment
vehicle generally engage common legal counsel in transactions in which both
are
participating. Although separate counsel may be engaged, the time and cost
savings and other efficiencies and advantages of using common counsel will
generally outweigh the disadvantages. In the event of a significant dispute
or
divergence of interests, typically in a work-out or other distressed situation,
separate representation may become desirable, and in litigation and other
circumstances, separate representation may be necessary.
Allocation
of Opportunities. In particular, our investment adviser
provides investment management, investment advice or other services in relation
to a number of investment vehicles of GSC Group, which focus on corporate
credit, distressed debt, mezzanine investments and structured finance products
and have investment objectives that are similar to or overlap with ours.
Investment opportunities that may be of interest to us may also be of interest
to GSC Group’s other investment vehicles, and GSC Group may buy or sell
securities for us which differ from securities which they may cause to be bought
or sold for GSC Group’s other investment vehicles. GSC Group may have
conflicting interests, including a larger capital commitment to, or larger
fees
from, another investment vehicle of GSC Group, in determining which investment
vehicle should pursue the investment opportunity.
Material
Nonpublic Information. GSC Group or its employees,
officers, principals or affiliates may come into possession of material
nonpublic information in connection with business activities unrelated to our
operations. The possession of such information may limit our ability to buy
or
sell securities or otherwise participate in an investment opportunity or to
take
other action it might consider in our best interest.
Cross-Trading. Subject
to applicable law, we may engage in transactions directly with other investment
vehicles managed by GSC Group, including the purchase or sale of all or a
portion of a portfolio investment. Cross-trades can save us brokerage
commissions and, in certain cases, related transaction costs. Cross-trades
between affiliates may create conflicts of interest with respect to certain
terms, including price, of the transaction. The 1940 Act imposes substantial
restrictions on cross-trades between us and investment vehicles managed by
GSC
Group. As a result, our board of directors has adopted cross-trading procedures
designed to ensure compliance with the requirements of the 1940 Act and will
regularly review the terms of any cross-trades.
25
Our
investment adviser’s liability is limited under the investment advisory and
management agreement and we will indemnify our investment adviser against
certain liabilities, which may lead our investment adviser to act in a riskier
manner on our behalf than it would when acting for its own
account.
Our
investment adviser has not assumed any responsibility to us other than to render
the services described in the investment advisory and management agreement.
Pursuant to the investment advisory and management agreement, our investment
adviser and its general partner, officers and employees are not liable to us
for
their acts, under the investment advisory and management agreement, absent
willful misfeasance, bad faith, gross negligence or reckless disregard in the
performance of their duties. We have agreed to indemnify, defend and protect
our
investment adviser and its general partner, officers and employees with respect
to all damages, liabilities, costs and expenses resulting from acts of our
investment adviser not arising out of willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties under the
investment advisory and management agreement. These protections may lead our
investment adviser to act in a riskier manner when acting on our behalf than
it
would when acting for its own account.
We
may be obligated to pay our investment adviser incentive compensation even
if we
incur a net loss, regardless of the market value of our common
stock.
Our
investment adviser is entitled to incentive compensation for each fiscal quarter
in an amount equal to a percentage of the excess of our investment income for
that quarter (before deducting incentive compensation, net operating losses
and
certain other items) above a threshold return for that quarter. Our
pre-incentive fee net investment income, for incentive compensation purposes,
excludes realized and unrealized capital losses that we may incur in the fiscal
quarter, even if such capital losses result in a net loss on our statement
of
operations for that quarter. Thus, we may be required to pay our investment
adviser incentive compensation for a fiscal quarter even if there is a decline
in the value of our Portfolio or we incur a net loss for that
quarter.
Under
the
investment advisory and management agreement, we will defer cash payment of
any
incentive fee otherwise earned by our investment adviser if, during the most
recent four full quarterly periods ending on or prior to the date such payment
is to be made, the sum of (a) our aggregate distributions to our
stockholders and (b) our change in net assets (defined as total assets less
liabilities) is less than 7.5% of our net assets at the beginning of such
period. These calculations will be appropriately pro rated during the first
three quarters of this fiscal year and will be adjusted for any share issuances
or repurchases. Furthermore, the incentive fee that we pay is not tied to the
market value of our common stock.
If
a
portfolio company defaults on a loan that is structured to provide accrued
interest, it is possible that accrued interest previously included in the
calculation of the incentive fee will become uncollectible. The investment
adviser is not under any obligation to reimburse us for any part of the
incentive fee it received that was based on accrued income that we never
received as a result of a default by an entity on the obligation that resulted
in the accrual of such income.
Changes
in laws or regulations governing our operations, or changes in the
interpretation thereof, and any failure by us to comply with laws or regulations
governing our operations may adversely affect our
business.
We
and our
portfolio companies are subject to regulation at the local, state and federal
levels. These laws and regulations, as well as their interpretation, may be
changed from time to time. Any change in these laws or regulations,
or their interpretation, or any failure by us to comply with these laws or
regulations may adversely affect our business.
26
As
discussed below, there is a risk that certain investments that we intend to
treat as qualifying assets will be determined to not be eligible for such
treatment. Any such determination would have a material adverse effect on our
business.
We
operate in a highly competitive market for investment
opportunities.
A
number
of entities compete with us to make the types of investments that we plan to
make in private middle market companies. We compete with other BDCs, public
and
private funds, commercial and investment banks, commercial financing companies,
insurance companies, high-yield investors, hedge funds, and, to the extent
they
provide an alternative form of financing, private equity funds. Many of our
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than us. Several other BDCs have recently
raised, or are expected to raise, significant amounts of capital, and may have
investment objectives that overlap with ours, which may create competition
for
investment opportunities. Some competitors may have a lower cost of funds and
access to funding sources that are not available to us. In addition, some of
our
competitors may have higher risk tolerances or different risk assessments that
could allow them to consider a wider variety of investments and establish more
relationships than us. Furthermore, many of our competitors are not subject
to
the regulatory restrictions that the 1940 Act will impose on us as a BDC. We
cannot assure you that the competitive pressures we face will not have a
material adverse effect on our business and financial condition. Also, as a
result of this competition, we may not be able to take advantage of attractive
investment opportunities from time to time, and we cannot assure you that we
will be able to identify and make investments that meet our investment
objectives.
We
do not
seek to compete primarily based on the interest rates we offer and we believe
that some of our competitors may make loans with interest rates that are
comparable to or lower than the rates we offer.
We
may
lose investment opportunities if we do not match our competitors’ pricing, terms
and structure. If we match our competitors’ pricing, terms and structure, we may
experience decreased net interest income and increased risk of credit loss.
As a
result of operating in such a competitive environment, we may make investments
that are on better terms to our portfolio companies than we originally
anticipated, which may impact our return on these investments.
We
are a
non-diversified investment company within the meaning of the 1940 Act, and
therefore are not limited with respect to the proportion of our assets that
may
be invested in securities of a single issuer. To the
extent that we assume large positions in the securities of a small number of
issuers, our net asset value may fluctuate to a greater extent than that of
a
diversified investment company as a result of changes in the financial condition
or the market’s assessment of the issuer. We may also be more
susceptible to any single economic or regulatory occurrence than a diversified
investment company. However, we intend to comply with the
diversification requirements imposed by the Code for qualification as a
RIC.
Risks
related to our operation as a BDC
Our
investment adviser has no experience managing a BDC.
The
1940
Act imposes numerous constraints on the operations of BDCs. For example, BDCs
are required to invest at least 70% of their total assets primarily in
securities of private U.S. operating companies or public U.S. companies whose
securities are not listed on a national securities exchange registered under
the
Exchange Act (i.e., New York Stock Exchange, American Stock Exchange and The
NASDAQ Global Market), cash, cash equivalents, U.S. government securities
and high quality debt investments that mature in one year or less. Our
investment
27
adviser
does not have any experience managing a BDC. The lack of experience of our
investment adviser in managing a portfolio of assets under such constraints
may
hinder its ability to take advantage of attractive investment opportunities
and,
as a result, achieve our investment objectives.
A
failure on our part to maintain our qualification as a BDC would significantly
reduce our operating flexibility.
If
we fail
to qualify as a BDC, we might be regulated as a closed-end investment company
under the 1940 Act, which would significantly decrease our operating
flexibility.
We
will be subject to corporate-level income tax if we fail to qualify as a
RIC.
We
will
seek to qualify as a RIC under the Code, which requires us to qualify
continuously as a BDC and meet certain source of income, distribution and asset
diversification requirements.
The
source
of income requirement is satisfied if we derive at least 90% of our annual
gross
income from interest, dividends, payments with respect to certain securities
loans, gains from the sale or other disposition of securities or options thereon
or foreign currencies, or other income derived with respect to our business
of
investing in such securities or currencies, and net income from interests in
“qualified publicly traded partnerships,” as defined in the Code.
The
annual
distribution requirement is satisfied if we distribute to our stockholders
on an
annual basis an amount equal to at least 90% of our ordinary net taxable income
and realized net short-term capital gains in excess of realized net long-term
capital losses, if any, reduced by deductible expenses. We are
subject to certain asset coverage ratio requirements under the 1940 Act and
covenants under the Facilities that could, under certain circumstances, restrict
us from making distributions necessary to qualify as a RIC. In such case, if
we
are unable to obtain cash from other sources, we may fail to qualify as a RIC
and, thus, may be subject to corporate-level income tax.
To
qualify
as a RIC, we must also meet certain asset diversification requirements at the
end of each calendar quarter. Failure to meet these tests may result in our
having to (i) dispose of certain investments quickly or (ii) raise
additional capital to prevent the loss of our RIC qualification. Because most
of
our investments will be in private companies, any such dispositions could be
made at disadvantageous prices and may result in substantial losses. If we
raise
additional capital to satisfy the asset diversification requirements, it could
take us time to invest such capital. During this period, we will invest the
additional capital in temporary investments, such as cash and cash equivalents,
which we expect will earn yields substantially lower than the interest income
that we anticipate receiving in respect of investments in first and second
lien
loans, mezzanine debt and high yield debt.
If
we fail
to qualify as a RIC for any reason, all of our taxable income will be subject
to
U.S. federal income tax at regular corporate rates. The resulting corporate
taxes could substantially reduce our net assets, the amount of income available
for distribution and the amount of our distributions. Such a failure would
have
a material adverse effect on us and our stockholders.
There
is a risk that you may not receive distributions or that our distributions
may
not grow over time.
As
a BDC
for 1940 Act purposes and a RIC for U.S. federal income tax purposes, we
intend to make distributions out of assets legally available for distribution
on
a quarterly basis to our stockholders once such distributions are authorized
by
our board of directors and declared by
28
us.
We
cannot assure you that we will achieve investment results that will allow us
to
make a specified level of cash distributions or year-to-year increases in cash
distributions. In addition, due to the asset coverage test that is applicable
to
us as a BDC, we may be limited in our ability to make distributions. Further,
if
we invest a greater amount of assets in equity securities that do not pay
current dividends, it could reduce the amount available for
distribution.
As
a BDC, we may have difficulty paying our required distributions if we recognize
income before or without receiving cash in respect of such
income.
For
U.S. federal income tax
purposes, we include in income certain amounts that we have not yet received
in
cash, such as original issue discount, which may arise if we receive warrants
in
connection with the making of a loan or possibly in other circumstances, or contracted
paid-in-kind
interest, which represents
contractual interest added to the loan balance and due at the end of the loan
term. Such original issue discount, which could be significant relative to
our
overall investment activities, or increases in loan
balances will be
included in income before we receive any corresponding cash payments. We also
may be required to include in income certain other amounts that we will not
receive in cash, including, for example, non-cash income
from
paid-in-kind
securities and deferred payment
securities.
Since
in certain cases we may recognize
income before or without receiving cash in respect of such income, we may have
difficulty meeting the requirement that we distribute an amount equal to at
least 90% of our ordinary
net taxable income and realized net short-term capital gains in excess of
realized net long-term capital losses, if any, reduced by deductible expenses,
to qualify as a RIC. Accordingly, we may have to sell some of our investments
at
times
we would not consider advantageous,
raise additional debt or equity capital or reduce new investments to meet these
distribution requirements. If we are not able to obtain cash from other sources,
we may fail to qualify as a RIC and thus be subject to
corporate-level income
tax.
Regulations
governing our operation as a BDC will affect our ability to, and the way in
which we, raise additional capital.
We
have incurred indebtedness under the Facilities
and
we
may issue debt securities
or preferred
stock, which we refer to
collectively as “senior
securities,” up to the maximum amount
permitted by
the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a
BDC,
to incur indebtedness or issue senior
securities only in amounts such that
our asset coverage, as
defined in the 1940 Act, equals
at least 200% after such incurrence or
issuance. If the value of our assets declines, we may be unable to satisfy
this
test, which would prohibit us from paying dividends and could prevent us from
qualifying as a RIC. If we
cannot satisfy this test, we may be required to sell a portion of our
investments and, depending on the nature of our leverage, repay a portion of
our
indebtedness at a time when such sales may be
disadvantageous.
We
are not generally able to issue and sell our
common stock at a
price below net asset value per share. We may, however, sell our common stock,
or warrants, options or rights to acquire our common stock, at a price below
the
current net asset value of the common stock if our board
of directors determines that such sale
is in our best interests and the best interests of our stockholders, and our
stockholders approve such sale. In any such case, the price at which our
securities are to be issued and sold may not be less than a price which,
in the determination of our board
of directors, closely approximates the market value of such securities (less
any
commission or discount). If our common stock trades at a discount to net asset
value, this restriction could adversely affect our ability
to raise
capital.
To
generate cash for funding new
investments, we
securitized
a substantial
portion of our portfolio via the Facilities. We may in
the future seek to do additional
securitizations. An
inability
29
to
successfully securitize our loan
portfolio could limit our
ability to grow our business, fully execute our business strategy and decrease
our earnings, if any. The securitization market is subject to changing market
conditions and we may not be able to access this market when we would
otherwise
deem appropriate. Moreover, the
successful securitization of our loan portfolio might expose us to losses as
the
residual loans in which we do not sell interests will tend to be those that
are
riskier and more apt to generate losses. The 1940 Act may also
impose restrictions on the structure
of any securitization.
If
our primary investments are deemed not to be qualifying assets, we could fail
to
qualify as a BDC or be precluded from investing according to our current
business plan.
If
we are to maintain our qualification as
a BDC, we must not
acquire any assets other than “qualifying assets”
unless, at the time of and after giving
effect to such acquisition, at least 70% of our total assets are qualifying
assets. We believe that the leveraged loans
and mezzanine investments
that we propose to
acquire constitute qualifying assets because the privately held issuers will
not, at the time of our investment, have securities listed on a national
securities exchange.
The
Securities and Exchange Commission (the “SEC”) has adopted a rule that defines
an “eligible portfolio company” as any private domestic operating company and
public domestic operating company that does not have securities listed on a
national securities exchange. In addition, the SEC has proposed a new rule
that
would expand the definition of eligible portfolio companies to include
publicly-traded companies with a market capitalization of less than
$250 million. If adopted or enacted, the effect of this rule would be to
further reduce or eliminate confusion surrounding whether a company qualifies
as
an eligible portfolio company. We cannot assure you that this rule will be
approved by the SEC. Until the SEC or its staff has issued a final rule, we
will
continue to monitor this issue closely. See “— Risks related to our
business — Changes in laws or regulations governing our operations, or
changes in the interpretation thereof, and any failure by us to comply with
laws
or regulations governing our operations may adversely affect our business”
above.
Our
common stock may trade at a discount
to our net asset value per share.
Common
stock of BDCs, as closed-end
investment companies, frequently trades at a discount to net asset value.
The
possibility that our common stock may trade at a discount to our net asset value is separate
and distinct
from the risk that our net asset value per share may
decline.
The
floating interest rate features of
any indebtedness incurred by us could adversely affect us if interest rates
rise.
Any
indebtedness incurred by us will likely bear interest at a floating rate based
on an index. As a result, if that index increases, our costs under any
indebtedness incurred would become more expensive, which could have a material
adverse effect on our earnings.
Risks
related to our investments
Our
investments may be risky, and you could lose all or part of your
investment.
Substantially
all of the debt investments held in the portfolio hold, and will likely continue
to hold, a non-investment grade rating by Moody’s Investors Service and/or
Standard & Poor’s or, where not rated by any rating agency, would be
below investment grade, if rated. Debt securities rated below investment grade
are commonly referred to as “junk bonds.” A below investment grade rating means
that, in the rating agency’s view, there is an increased risk that the
30
obligor
on
such debt will be unable to pay interest and repay principal on its debt in
full. We may also invest in debt that defers or pays paid-in-kind
interest. To the extent interest payments associated with such debt
are deferred, such debt will be subject to greater fluctuations in value based
on changes in interest rates, such debt could produce taxable income without
a
corresponding cash payment to us, and since we generally do not receive any
cash
prior to maturity of the debt, the investment will be of greater
risk.
In
addition, private middle market companies in which we expect to invest are
exposed to a number of significant risks, including:
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limited
financial resources and
an inability
to meet their
obligations, which may be accompanied by a deterioration in the value
of
any collateral and a reduction in the likelihood of us realizing
any
guarantees we may have obtained in connection with our
investment;
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shorter
operating histories, narrower
product lines
and smaller market shares than larger businesses, which tend to render
them more vulnerable to competitors’
actions and market conditions, as
well as general economic downturns;
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dependence
on
the management talents and efforts
of a small group
of persons; the death, disability, resignation or termination of
one or
more of which
could
have a material adverse
impact on the
company and,
in turn,
on us;
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less
predictable operating
results and,
possibly, substantial
additional capital
requirements
to support
their
operations, finance expansion or maintain their competitive
position; and
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difficulty
accessing the capital
markets to meet future capital
needs.
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In
addition, our executive
officers, directors and
our
investment adviser may, in the ordinary course of business, be named as
defendants in litigation arising from our investments in the portfolio
companies.
Economic
recessions or downturns could impair our portfolio companies and harm our
operating results.
Many
of
our portfolio companies may be susceptible to economic slowdowns or recessions
and may be unable to repay our loans during these periods. Therefore, our
non-performing assets are likely to increase and the value of our portfolio
is
likely to decrease during these periods. Adverse economic conditions also may
decrease the value of collateral securing some of our loans and the value of
our
equity investments. Economic slowdowns or recessions could lead to financial
losses in our portfolio and a decrease in revenues, net income and assets.
Unfavorable economic conditions also could increase our funding costs, limit
our
access to the capital markets or result in a decision by lenders not to extend
credit to us. These events could prevent us from increasing investments and
harm
our operating results.
A
portfolio company’s failure to satisfy financial or operating covenants imposed
by us or other lenders could lead to defaults and, potentially, acceleration
of
the time when the loans are due and foreclosure on its secured assets, which
could trigger cross-defaults under other agreements and jeopardize our portfolio
company’s ability to meet its obligations under the debt that we hold and the
value of any equity securities we own. We may incur expenses to the extent
necessary to seek recovery upon default or to negotiate new terms with a
defaulting portfolio company.
31
There
may be circumstances where our debt investments could be subordinated to claims
of other creditors or we could be subject to lender liability
claims.
If
one of
our portfolio companies were to go bankrupt, even though we may have structured
our interest as senior debt, depending on the facts and circumstances, including
the extent to which we actually provided managerial assistance to that portfolio
company, a bankruptcy court might recharacterize our debt holding and
subordinate all or a portion of our claim to that of other creditors. In
addition, lenders can be subject to lender liability claims for actions taken
by
them where they become too involved in the borrower’s business or exercise
control over the borrower. It is possible that we could become subject to a
lender’s liability claim, including as a result of actions taken if we actually
render significant managerial assistance.
The
debt securities in which we invest are subject to credit risk and prepayment
risk.
An
issuer
of debt security may be unable to make interest payments and repay principal.
We
could lose money if the issuer of a debt obligation is, or is perceived to
be,
unable or unwilling to make timely principal and/or interest payments, or to
otherwise honor its obligations. The downgrade of a security by rating agencies
may further decrease its value.
Certain
debt instruments may contain call or redemption provisions which would allow
the
issuer thereof to prepay principal prior to the debt instrument’s stated
maturity. This is known as prepayment risk. Prepayment risk is greater during
a
falling interest rate environment as issuers can reduce their cost of capital
by
refinancing higher interest debt instruments with lower interest debt
instruments. An issuer may also elect to refinance their debt instruments with
lower interest debt instruments if the credit standing of the issuer improves.
To the extent debt securities in our portfolio are called or redeemed, we may
receive less than we paid for such security and we may be forced to reinvest
in
lower yielding securities or debt securities of issuers of lower credit
quality.
Available
information about privately held companies is
limited.
We
invest
primarily in privately-held companies. Generally, little public information
exists about these companies, and we are required to rely on the ability of
our
investment adviser’s investment professionals to obtain adequate information to
evaluate the potential returns from investing in these companies. These
companies and their financial information are not subject to the Sarbanes-Oxley
Act and other rules that govern public companies. If we are unable to uncover
all material information about these companies, we may not make a fully informed
investment decision, and we may lose money on our investments.
Our
portfolio companies may incur debt or issue equity securities that rank equally
with, or senior to, our investments in such
companies.
Our
portfolio companies usually will have, or may be permitted to incur, other
debt,
or issue other equity securities, that rank equally with, or senior to, our
investments. By their terms, such instruments may provide that the holders
are
entitled to receive payment of dividends, interest or principal on or before
the
dates on which we are entitled to receive payments in respect of our
investments. These debt instruments will usually prohibit the portfolio
companies from paying interest on or repaying our investments in the event
and
during the continuance of a default under such debt. Also, in the event of
insolvency, liquidation, dissolution, reorganization or bankruptcy of a
portfolio company, holders of securities ranking senior to our investment in
that portfolio company would typically be entitled to receive payment in full
before we receive any distribution in respect of our investment. After repaying
such holders, the portfolio company may not have any remaining assets to use
for
repaying its obligation to us. In the case of debtor equity ranking equally
with
our investments, we would have to share on an equal basis any distributions
32
with
other
holders in the event of an insolvency, liquidation, dissolution, reorganization
or bankruptcy of the relevant portfolio company.
Investments
in equity securities involve a substantial degree of
risk.
We
may
purchase common stock and other equity securities. Although equity securities
have historically generated higher average total returns than fixed-income
securities over the long term, equity securities also have experienced
significantly more volatility in those returns and in recent years have
significantly under performed relative to fixed-income securities. The equity
securities we acquire may fail to appreciate and may decline in value or become
worthless and our ability to recover our investment will depend on our portfolio
company’s success. Investments in equity securities involve a number of
significant risks, including:
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any
equity investment we make in a
portfolio company could be subject to further dilution as a result
of the
issuance of additional equity interests and to serious risks as a
junior
security that will
be subordinate to all
indebtedness or senior
securities in
the event that the
issuer is unable to meet its obligations or becomes subject to a
bankruptcy process;
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to
the extent that the portfolio
company requires additional capital and is unable to obtain it, we
may not
recover our investment in equity
securities; and
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in
some cases, equity securities
in which we invest will not pay current dividends, and our ability
to
realize a return on our investment, as well as to recover our investment,
will be dependent on the success of our portfolio
companies. Even if
the portfolio companies are successful, our ability to realize the
value
of our investment may be dependent on the occurrence of a liquidity
event,
such as a public offering or the sale of the portfolio company. It
is
likely
to take a significant amount of
time before a liquidity event occurs or we can sell our equity
investments. In addition, the equity securities we receive or invest
in
may be subject to restrictions on resale during periods in which
it could
be advantageous
to
sell.
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There
are special risks associated with
investing in preferred securities, including:
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preferred
securities may include
provisions that permit the issuer, at its discretion, to defer
distributions for a stated period without any adverse consequences
to the issuer.
If we own a preferred security that is deferring its distributions,
we may
be required to report income for tax purposes even though we have
not
received any cash payments in respect of such
income;
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preferred
securities
are subordinated
with respect
to
corporate income
and
liquidation payments, and are therefore
subject to greater risk
than debt;
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preferred
securities may be
substantially less liquid than many other securities, such as common
securities or
U.S. government
securities; and
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preferred
security holders
generally have no voting rights with respect to the issuing company,
subject to limited
exceptions.
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Our
investments in foreign debt, including that of emerging market issuers, may
involve significant risks in addition to the risks inherent in
U.S. investments.
33
Although
there are limitations on our ability to invest in foreign debt, we may, from
time to time, invest in debt of foreign companies, including the debt of
emerging market issuers. Investing in foreign companies may expose us to
additional risks not typically associated with investing in U.S. companies.
These risks include changes in exchange control regulations, political and
social instability, expropriation, imposition of foreign taxes, less liquid
markets and less available information than is generally the case in the United
States, higher transaction costs, less government supervision of exchanges,
brokers and issuers, less developed bankruptcy laws, difficulty in enforcing
contractual obligations, lack of uniform accounting and auditing standards
and
greater price volatility. Investments in the debt of emerging market issuers
may
subject us to additional risks such as inflation, wage and price controls,
and
the imposition of trade barriers. Furthermore, economic conditions in emerging
market countries are, to some extent, influenced by economic and securities
market conditions in other emerging market countries. Although economic
conditions are different in each country, investors’ reaction to developments in
one country can have effects on the debt of issuers in other
countries.
Although
most of our investments will be U.S. dollar-denominated, our investments
that are denominated in a foreign currency will be subject to the risk that
the
value of a particular currency will change in relation to one or more other
currencies. Among the factors that may affect currency values are trade
balances, the level of short-term interest rates, differences in relative values
of similar assets in different currencies, long-term opportunities for
investment and capital appreciation, and political developments. We may employ
hedging techniques to minimize these risks, but we cannot assure you that we
will fully hedge against these risks or that such strategies will be
effective.
We
may expose ourselves to risks if we engage in hedging
transactions.
We
may
utilize instruments such as forward contracts, currency options and interest
rate swaps, caps, collars and floors to seek to hedge against fluctuations
in
the relative values of our portfolio positions from changes in currency exchange
rates and market interest rates. Use of these hedging instruments may expose
us
to counter-party credit risk. Hedging against a decline in the values of our
portfolio positions does not eliminate the possibility of fluctuations in the
values of such positions or prevent losses if the values of such positions
decline. However, such hedging can establish other positions designed to gain
from those same developments, thereby offsetting the decline in the value of
such portfolio positions. Such hedging transactions may also limit the
opportunity for gain if the values of the portfolio positions should increase.
Moreover, it may not be possible to hedge against an exchange rate or interest
rate fluctuation that is generally anticipated at an acceptable
price.
The
lack of liquidity in our investments may adversely affect our
business.
We
expect
to make investments in private companies. A portion of these securities may
be
subject to legal and other restrictions on resale, transfer, pledge or other
disposition or will otherwise be less liquid than publicly traded securities.
The illiquidity of our investments may make it difficult for us to sell such
investments if the need arises. In addition, if we are required to liquidate
all
or a portion of our portfolio quickly, we may realize significantly less than
the value at which we have previously recorded our investments. In addition,
we
may face other restrictions on our ability to liquidate an investment in a
business entity to the extent that we or our investment adviser has or could
be
deemed to have material non-public information regarding such business
entity.
When
we are a debt or minority equity investor in a portfolio company, we may not
be
in a position to control the entity, and its management may make decisions
that
could decrease the value of our investment.
34
We
anticipate making both debt and minority equity investments; therefore, we
will
be subject to the risk that a portfolio company may make business decisions
with
which we disagree, and the stockholders and management of such company may
take
risks or otherwise act in ways that do not serve our interests. As a result,
a
portfolio company may make decisions that could decrease the value of our
portfolio holdings.
Our
board of directors may change our operating policies and strategies without
prior notice or stockholder approval, the effects of which may be
adverse.
Our
board
of directors has the authority to modify or waive our current operating policies
and our strategies without prior notice and without stockholder approval. We
cannot predict the effect any changes to our current operating policies and
strategies would have on our business, financial condition, and value of our
common stock. However, the effects might be adverse, which could negatively
impact our ability to pay dividends and cause you to lose all or part of your
investment.
Risks
related to an investment in our shares
Investing
in our common stock may involve an above average degree of
risk.
The
investments we make in accordance with our investment objectives may result
in a
higher amount of risk than alternative investment options and volatility or
loss
of principal. Our investments in portfolio companies may be highly speculative
and aggressive, and therefore, an investment in our common stock may not be
suitable for someone with lower risk tolerance.
The
market price of our common stock may fluctuate
significantly.
The
market
price and liquidity of the market for our common stock may be significantly
affected by numerous factors, some of which are beyond our control and may
not
be directly related to our operating performance. These factors
include:
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significant
volatility
in the market
price
and trading volume of securities of BDCs
or other companies in our sector,
which are not necessarily related to the operating performance of
these
companies;
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changes
in regulatory policies or
tax rules, particularly with respect to RICs
or
BDCs;
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loss
of RIC
qualification;
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changes
in earnings or variations
in operating results;
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changes
in the value of our
portfolio of investments;
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any
shortfall in revenue or net
income or any
increase in losses from levels expected by investors or securities
analysts;
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departure
of our investment
adviser’s
key
personnel;
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operating
performance of companies
comparable to us;
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general
economic trends and
other external
factors; and
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loss
of a major funding
source.
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35
Provisions
of our governing documents
and the Maryland General Corporation Law could deter takeover attempts and
have
an adverse impact on the price of our common
stock.
We
are governed by our charter and
bylaws, which we refer to as our “governing
documents.”
Our
governing documents and the Maryland
General Corporation Law contain provisions that may have the effect of delaying,
deferring or preventing a transaction or a change in control of us that might
involve a premium price for our stockholders or otherwise be in their best
interest.
Our
charter provides for the
classification of our board of directors into three classes of directors,
serving staggered three-year terms, which may render a change of control
of us
or removal of our incumbent management more difficult. Furthermore, any and
all
vacancies on our board of directors will be filled generally only by the
affirmative vote of a majority of the remaining directors in office, even
if the
remaining directors do not constitute a quorum, and any director elected
to fill
a vacancy will serve for the remainder of the full term until a successor
is
elected and qualifies.
Our
board of directors is authorized to
create and issue new series of shares, to classify or reclassify any unissued
shares of stock into one or more classes or series, including preferred stock
and, without stockholder approval, to amend our charter to increase or decrease
the number of shares of stock that we have authority to issue, which could
have
the effect of diluting a stockholder’s ownership interest. Prior to the issuance
of shares of stock of each class or series, including any reclassified series,
our board of directors is required by our governing documents to set the
terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms
or
conditions of redemption for each class or series of shares of
stock.
Our
governing documents also provide
that our board of directors has the exclusive power to adopt, alter or repeal
any provision of our bylaws, and to make new bylaws. The Maryland General
Corporation Law also contains certain provisions that may limit the ability
of a
third party to acquire control of us, such as:
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The
Maryland Business Combination
Act, which, subject to certain limitations, prohibits certain business
combinations between us and an “interested stockholder” (defined generally
as any person who beneficially owns 10% or more of the voting power
of the
common stock or an affiliate thereof) for five years after the most
recent
date on which the stockholder becomes an interested stockholder and,
thereafter, imposes special minimum price provisions and special
stockholder voting requirements on these
combinations; and
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The
Maryland Control Share
Acquisition Act, which provides that “control shares” of a
Maryland corporation (defined as shares of common stock which, when
aggregated with other shares of common stock controlled by the
stockholder, entitles the stockholder to exercise one of three increasing
ranges of voting power in electing directors) acquired in a “control share
acquisition” (defined as the direct or indirect acquisition of ownership
or control of “control shares”) have no voting rights except to the extent
approved by stockholders by the affirmative vote of at least two-thirds
of
all the votes entitled to be cast on the matter, excluding all
interested
shares of common
stock.
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The
provisions of the Maryland Business
Combination Act will not apply, however, if our board of directors adopts
a
resolution that any business combination between us and any other
36
person
will be exempt from the
provisions of the Maryland Business Combination Act. Although our board of
directors has adopted such a resolution, there can be no assurance that this resolution
will not be altered or
repealed in whole or in part at any time. If the resolution is altered or
repealed, the provisions of the Maryland Business Combination Act may discourage
others from trying to acquire control of us.
As
permitted by Maryland
law, our bylaws contain a provision
exempting from the Maryland Control Share Acquisition Act any and all
acquisitions by any person of our common stock. Although our bylaws include
such
a provision, such a provision may also be amended or eliminated by our board
of
directors at any time in the future.
37
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Unresolved
Staff Comments
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None.
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Properties
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Our
corporate office is located at
12
East 49th Street,
Suite 3200,
New
York, New
York 10017.
Our telephone number is
(212) 884-6200. We have an additional office located at 535 Madison Avenue,
Floor 17, New York,
New
York 10022.
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Legal
Proceedings
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Neither
we nor our investment adviser
are currently
subject to any material legal proceedings.
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Submission
of Matters to a Vote of Security
Holders
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No
matters
were submitted to a vote of stockholders through the solicitation of proxies
or
otherwise during the fourth quarter of the fiscal year ending February 28,
2007.
38
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities
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PRICE
RANGE OF COMMON STOCK
Our
common
stock is quoted on the New York Stock Exchange under the symbol “GNV” and
started trading on March 23, 2007 at an initial public offering price of $15.00
per share. Prior to such date there was no public market for our common
stock.
HOLDERS
As
of
February 28, 2007, there was one holder of record of our common
stock.
SALES
OF UNREGISTERED SECURITIES
We
did not
sell any securities during the period covered by this report that were not
registered under the Securities Act.
ISSUER
PURCHASES OF EQUITY SECURITIES
We
did not
repurchase any shares of our common stock during the three months ended February
28, 2007.
DIVIDEND
POLICY
We
intend to make quarterly
distributions to our stockholders out of assets legally available for
distribution. Our quarterly distributions, if any, will be determined
by our board of directors.
Any such distributions will be taxable to our stockholders, including to those
stockholders who receive additional shares of our common stock pursuant to
a
dividend reinvestment plan. In order to maintain our qualification as a
RIC,
we must for each fiscal year
distribute an amount equal to at least
90% of our ordinary net taxable income and realized net short-term capital
gains
in excess of realized net long-term capital losses, if any, reduced by
deductible expenses. To avoid certain excise taxes imposed
on RICs, we
currently intend to distribute during each calendar year
an amount at least equal to the sum
of (1) 98% of our ordinary income for the
calendar year,
(2) 98% of our capital gains
in excess of capital losses for the one-year period ending
on October 31
of the calendar year and (3) any ordinary income and net capital gains for
preceding years that were not distributed during such years. In addition,
although we currently intend to distribute realized net capital gains
(i.e.,
net long-term capital gains in
excess of short-term capital losses), if any, at least annually, out of the
assets legally available for such distributions, we may in the future decide
to
retain such capital gains for investment. We
cannot assure you that we will achieve
results that will
permit the payment of any cash distributions. In addition, we
are
prohibited from making distributions
that cause
us to fail to maintain the asset
coverage ratios stipulated by the 1940 Act or that violate
our debt covenants.
We
maintain an “opt out” dividend reinvestment plan for our common stockholders. As
a result, if we declare a dividend, then stockholders’ cash dividends will be
automatically reinvested in additional shares of our common stock, unless they
specifically “opt out” of the dividend reinvestment plan so as to receive cash
dividends.
39
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Selected
Financial Data
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Not
applicable. As of February 28, 2007, we had not yet commenced
operations.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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The
following discussion should be read in conjunction with our financial statements
and related notes and other financial information appearing elsewhere in this
Annual Report. In addition to historical information, the following discussion
and other parts of this Annual Report 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 under “Risk Factors” and “Note about Forward-Looking Statements”
appearing elsewhere herein.
Overview
GSC
Investment Corp. was incorporated
under the Maryland General Corporation Law on March 21, 2007. We have
elected to be treated as a BDC under the 1940 Act. As
a BDC, we are
required to comply with certain regulatory requirements. For instance, we
generally have to invest at least 70% of our total assets in “qualifying assets,”
including securities of private
U.S. operating companies or
public
U.S. companies whose securities
are not listed on a national securities exchange registered under the Exchange
Act (i.e., New York Stock Exchange, American Stock Exchange and The NASDAQ
Global Market), cash, cash equivalents, U.S. government securities
and
high-quality debt investments that
mature in one year or less. In addition, we are subject to a leverage
restriction. We are only allowed to borrow amounts, with certain limited
exceptions, such that our asset coverage, as defined in the 1940 Act,
equals
at least 200% after such borrowing.
The amount of leverage that we employ will depend on our investment
adviser’s
and our board of directors’
assessment of market and other factors
at the time of any proposed borrowing. We used
the proceeds of our
initial public offering in
March 2007 to acquire portfolios in March and April 2007 of approximately
$89.5 million and $11.2 million, respectively, in aggregate principal amount
of
debt investments. We entered into the Revolving Facility on April 11,
2007 and the Term Facility on May 1, 2007 and used the proceeds thereof to
acquire additional debt investments of $55.8 and $59.3 million in April and
May
2007, respectively.
Revenues
We generate
revenue in the form of interest income
on the debt that we hold and capital gains, if any,
on warrants or
other equity interests that we may acquire in portfolio companies. We expect
our
debt investments, whether in the form of first and second lien leveraged loans,
mezzanine debt or high yield bonds,
to have terms of up to ten years, and typically
to bear
interest at a fixed or floating rate. Interest on debt will be payable generally
quarterly or semi-annually.
In some cases
our debt investments may provide for a portion of the
interest payable to be paid-in-kind interest. 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 and possibly
consulting
fees. Any such fees will be generated
in connection with our investments and recognized as earned. We may also
invest in
equity securities, which may, in some
cases, include preferred securities that pay dividends on a current
basis.
40
Expenses
Our
primary operating expenses
include the payment of investment
advisory and management fees and overhead expenses, including our allocable
portion of our administrator’s
overhead under the administration
agreement. Our allocable portion is
based on the proportion that our total assets
bears to the total
assets administered by our administrator. 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; administration 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; registration fees; listing
fees;
taxes; independent directors’
fees and expenses; costs of preparing
and filing reports or other documents of the SEC; the costs of any
reports,
proxy statements or other notices
to stockholders, including printing costs; to the extent we are covered by
any
joint insurance policies, our allocable portion of the insurance premiums for
such policies; direct costs and expenses of administration, including
auditor and legal costs; and
all other expenses
incurred
by us or our
administrator in connection with administering our business. We
estimate our annual expenses will be
approximately $2.5 million.
For a period of at
least 12 months ending March 23,
2008, we will be reimbursed
by the manager for
operating expenses
to
the extent
that operating expenses (other than
investment advisory and management fees and interest expense) exceed an
amount
equal to 1.55% of our net assets
attributable to
common stock.
To
the extent that any of our 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 futures, options
and
forward contracts. Costs incurred in entering into such contracts or in settling
them will be borne by
us.
Financial
condition, liquidity and capital resources
We
generated cash from the net proceeds of our IPO and borrowings under the
Facilities. In the future, we may generate cash from future offerings
of securities, future borrowings and 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. In the future, we may also securitize a portion of our investments in
first and second lien leveraged loans or mezzanine debt or other assets. Our
primary use of funds will be investments in our targeted asset classes and
cash
distributions to holders of our common stock.
Distribution
policy
We
intend
to qualify as a RIC under the Code, which allows us to avoid corporate-level
tax
on our income. To qualify as a RIC, we must distribute to our stockholders
an
amount equal to at least 90% of our ordinary net taxable income and realized
net
short-term capital gains in excess of realized net long-term capital losses,
if
any, reduced by deductible expenses, on an annual basis. We intend to pay
dividends on a quarterly basis. In addition, we also intend to distribute any
41
realized
net capital gains (i.e., realized net long-term capital gains in excess of
realized net short-term capital losses) at least annually out of the assets
legally available for such distributions.
Contractual
obligations
We
have
entered into three contracts under which we have material future commitments:
the investment advisory and management agreement, pursuant to which GSCP (NJ),
L.P. has agreed to serve as our investment adviser; the administration
agreement, pursuant to which 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, and a license
agreement with GSC Group, pursuant to which GSC Group has agreed to grant us
a
non-exclusive, royalty-free license to use the name “GSC” and the GSC logo.
Payments under the investment advisory and management agreement are equal to
(1) a percentage of the value of our total assets (other than cash and cash
equivalents but including assets purchased with borrowed funds) and (2) an
incentive fee based on our performance. Payments under the administration
agreement are equal to an amount based upon our allocable portion of our
administrator’s overhead in performing its obligations under the administration
agreement, including rent and our allocable portion of the cost of our officers
and their respective staffs. Each of these contracts may be terminated by either
party without penalty upon 60 days written notice to the other. Further,
although our Chief Financial Officer, Chief Compliance Officer, and Vice
President and Secretary have certain duties to us, they also perform duties
for
other GSC Group-related entities.
Management
and service fee
Pursuant
to the investment advisory and management
agreement, we
pay our investment adviser a fee for investment advisory and management services
consisting of two components —
a base management fee and an incentive
fee.
As
originally adopted, the base management fee was
calculated
based on the average value of our
total assets (other than cash or cash equivalents but including assets purchased
with borrowed funds) at the end of the two most recently completed calendar
quarters, and appropriately adjusted for any share issuances or
repurchases during the current calendar
quarter.
The
incentive fee has two
parts, as
follows:
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 the net assets at the end of the
immediately
preceding quarter (including interest that is accrued but not yet received
in
cash), that exceeds a 1.875% quarterly (7.5% annualized) hurdle rate measured
as
of the end of each calendar quarter. Under this provision, in any
calendar quarter, our investment
adviser receives no incentive fee unless our pre-incentive fee net investment
income exceeds the hurdle rate of 1.875%. Amounts received as a return of
capital are not
included in calculating this portion
of the incentive fee. Since
the hurdle rate is based on net assets, a return of less than the hurdle rate
on
total assets may still result in an incentive fee.
The
second, payable at the end of each
calendar year equals 20% of our net realized capital gains, if any,
computed net of all
realized capital losses and unrealized capital depreciation, in each case on
a
cumulative basis, less the aggregate amount of capital gains incentive fees
paid
to the investment adviser through such date.
On
May 18, 2007, our
board of directors
approved an amendment
to the investment advisory
and management agreement providing that the base management fee and
incentive fee shall be computed with reference to the fiscal year of the
Company rather than the calendar year (in order to align the fee calculation
dates with the financial reporting cycle).
42
Operations
As
of
February 28, 2007, we had not yet commenced operations.
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Quantitative
and Qualitative Disclosures about Market
Risk
|
Our
business activities contain elements of market risks. We consider our principal
market risks to be fluctuations in interest rates and the valuations of our
investment portfolio. Essential to our business is managing these risks.
Accordingly, we have systems and procedures designed to identify and analyze
our
risks, to establish appropriate policies and thresholds and to continually
monitor these risks and thresholds by means of administrative and information
technology systems and other policies and processes.
Interest
Rate Risk
Interest
rate risk is defined as the
sensitivity of our current and future earnings to interest rate volatility,
variability of spread relationships, the difference in re-pricing intervals
between our assets and liabilities and the effect that interest rates may have
on our cash flows. Changes in the general level of interest rates can affect
our
net interest income, which is the difference between the interest income earned
on interest earning assets and our interest expense incurred in connection
with
our interest bearing debt and liabilities. Changes in interest rates can also
affect, among other things, our ability to acquire and originate loans and
securities and the value of our investment portfolio.
Our
investment income is affected by fluctuations in various interest rates,
including LIBOR and prime rates. We expect that future portfolio investments
may
include assets that carry a fixed interest rate. As of February 28, 2007, we
had
no borrowings outstanding. However, on April 11, 2007, we established the
Revolving Facility, which allows us to borrow up to $100 million (which amount
may be increased to $130 million subject to certain conditions) and on May
1,
2007, we borrowed $25.7 million under our Term Facility, interest on each of
which is tied to the prevailing commercial paper rate plus a margin of
0.70%.
Because
we
plan on borrowing money to make investments, our net investment income is
dependent upon the difference between the rate at which we borrow funds and
the
rate at which we invest the funds borrowed. Accordingly, there can be no
assurance that a significant change in market interest rates will not have
a
material adverse effect on our net investment income. In periods of rising
interest rates, our cost of funds would increase, which could reduce our net
investment income if there is not a corresponding increase in interest income
generated by floating rate assets in our investment portfolio.
We
did not
hold any derivative financial instruments for hedging purposes as
of February 28, 2007. We entered into three interest rate caps in
connection with the entry into and upsizing of the Revolving Facility and the
entry into the Term Facility.
Portfolio
Valuation
We
carry
our investments at fair value, as determined in good faith by our Board of
Directors. Investments for which market quotations are readily available are
valued at such market quotations. Because there is not a readily available
market value for some of the investments in
43
our
portfolio, we value a material portion of our portfolio investments at fair
value as determined in good faith by our board under a valuation policy and
a
consistently applied valuation process. Due to the inherent uncertainty of
determining the fair value of investments that do not have a readily available
market value, the fair value of our investments may differ significantly from
the values that would have been used had a ready market existed for such
investments, and the differences could be material. In addition, changes in
the
market environment and other events that may occur over the life of the
investments may cause the gains or losses ultimately realized on these
investments to be different than the valuations that are assigned. The types
of
factors that we may take into account in fair value pricing of our investments
include, as relevant, the nature and realizable value of any collateral, third
party valuations, the portfolio company’s ability to make payments and its
earnings and discounted cash flow, the markets in which the portfolio company
does business, comparison to publicly-traded securities, recent sales of or
offers to buy comparable companies, and other relevant factors.
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Financial
Statements and Supplementary
Data
|
Our
financial statements are annexed to this Annual Report beginning on page
F-1.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
Not
applicable.
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Controls
and Procedures
|
Evaluation
of Controls and Procedures. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as defined in Rule 13a-15(f) under the Exchange Act. The Company’s management,
under the supervision and with the participation of various members of
management, including our CEO and our CFO, has evaluated the effectiveness
of
the design and operation of our disclosure controls and procedures (as defined
in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered
by
this report. Based upon that evaluation, our CEO and CFO have concluded that
our
current disclosure controls and procedures are effective as of the end of the
period covered by this report. This annual report does not include a report
of
management’s assessment regarding internal control over financial reporting or
an attestation report of the company’s registered public accounting firm due to
a transition period established by rules of the Securities and Exchange
Commission for newly public companies.
Changes
in Internal Controls. There have been no changes in the Company’s
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Securities Exchange Act of 1934) that occurred during the
period ended February 28, 2007 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
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Other
Information
|
None.
44
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Directors,
Executive Officers and Corporate
Governance
|
Our
business and affairs are managed
under the direction of our board of directors. The board of directors currently
consists of 7 members, of whom 4 are not “interested persons”
of GSC Investment Corp. as defined in
Section 2(a)(19) of the 1940 Act. Our board of directors elects our
officers, who will
serve at the discretion
of
the board of directors.
Executive
officers and board of
directors
Under
our charter, our
directors are divided into
three classes. Each class of directors will
hold office for a three-year term.
However, the initial members of the three classes have initial terms of one,
two
and three years, respectively. At each annual meeting of our stockholders,
the successors to the
class
of directors whose terms expire at such meeting will be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third
year
following the year of their election. Each director will hold office
for
the term to which he or she is
elected and until his or her successor is duly elected and
qualified.
Directors
As
of May 1,
2007, information regarding
the board of directors is
as
follows:
|
Name
|
Age
|
Position
|
Director Since
|
Expiration of
Term
|
Principal
Occupation(s) During
Last
Five
Years
|
Other
Directorships/ Trusteeships
Held by Board
Member
|
||||
|
Independent
Directors
|
||||||||||
|
Peter
K.
Barker
|
58
|
Director
|
2007
|
2009
|
Currently
a private investor.
Prior to
2002, Mr. Barker
served as
an Advisory
Director of Goldman,
Sachs &
Co.
|
Avery
Dennison Corporation
|
||||
|
Steven
M.
Looney
|
57
|
Director
|
2007
|
2010
|
Currently
Managing Director
of Peale
Davies & Co.
Inc. Prior to
2005, Mr. Looney
served as
Senior Vice
President and
Chief Financial
Officer of
PCCI, Inc.
|
Sun
Healthcare, WH
Industries, APW,
Ltd.,
and Vein Associates of
America, Inc
|
||||
|
Charles
S.
Whitman III
|
65
|
Director
|
2007
|
2010
|
Currently
is senior
counsel (retired)
at Davis
Polk & Wardwell.
Prior to
2006, Mr. Whitman
was a Partner
in Davis Polk’s Corporate
Department.
|
none
|
||||
|
G.
Cabell
Williams
|
52
|
Director
|
2007
|
2008
|
Currently
is Managing General
Partner of Williams
and
Gallagher. Prior
to 2004, Mr. Williams
served as Managing
Director of Allied
Capital
Corporation.
|
none
|
||||
|
Interested
Directors
|
||||||||||
|
Thomas
V.
Inglesby
|
49
|
Chief
Executive Officer and
Director
|
2007
|
2008
|
Joined
GSC Group at
its inception
in 1999 and
has been
a Senior
Managing Director
since
2006.
|
none
|
||||
45
|
Name
|
Age
|
Position
|
Director Since
|
Expiration of
Term
|
Principal
Occupation(s) During
Last
Five
Years
|
Other
Directorships/ Trusteeships
Held by Board
Member
|
|||
|
Richard
M.
Hayden
|
61
|
Chairman
of the Board of
Directors
|
2007
|
2009
|
Joined
GSC Group in 2000 and has
been a Vice Chairman
of GSC Group since 2000 and is head of the corporate credit group.
Prior
to 2000, Mr. Hayden was a Partner of Goldman, Sachs &
Co.,
where he was a Managing Director
and the Deputy Chairman of Goldman, Sachs & Co. International
Ltd., responsible for
all European investment
banking activities.
|
COFRA
Holdings, AG and Deutsche
Boerse AG
|
|||
|
Robert
F.
Cummings, Jr.
|
56
|
Director
|
2007
|
2010
|
Joined
GSC Group in 2002 and has
been a Senior
Managing Director since 2006 and
Chairman of the Risk & Conflicts Committee and the
Valuation Committee
since 2003. Prior to joining GSC Group, was a Partner of Goldman,
Sachs & Co., where he was a member of the Corporate Finance
Department, advising corporate clients on financing, mergers and
acquisitions, and strategic financial
issues.
|
GSC
Capital Corp., Precision
Partners Inc., RR Donnelley and Sons Co., Corning Inc., Viasystems
Group
Inc., and a member of the Board of Trustees of Union
College
|
|||
The
address for each director is
c/o GSC Investment Corp., 12 East 49th Street,
New
York, New York 10017.
Executive
officers who are not
directors
Information
regarding our executive
officers who are not
directors is as follows:
|
Name
|
Age
|
Position
|
Since
|
Principal
Occupation(s) During
Last
Five
Years
|
Other
Directorships/ Trusteeships Held by Board Member |
||
|
David
L. Goret
|
43
|
Vice
President and Secretary
|
2006
|
Joined
GSC Group as General Counsel in 2004, where he manages legal, human
resources and certain and general counsel of Hawk Holdings, LLC.
From 2002
to 2003, he served as senior vice president and general counsel of
Mercator Software, Inc.
|
none
|
|||
46
|
Name
|
Age
|
Position
|
Since
|
Principal
Occupation(s) During
Last
Five
Years
|
Other
Directorships/ Trusteeships Held by Board Member |
||
|
Richard
T. Allorto, Jr.
|
35
|
Chief
Financial Officer
|
2006
|
Joined
GSC Group in 2001 and is responsible for overseeing the financial
statement preparation and accounting operations relating to the funds
managed by GSC Group. Mr. Allorto was with Schering Plough Corp. from
1998 to 2001, where he worked as an Audit Supervisor within the internal
audit group with a focus on operational audits of the company’s
international subsidiaries.
|
none
|
|||
|
Michael
J. Monticciolo
|
35
|
Chief
Compliance Officer
|
2006
|
Joined
GSC Group in 2006. From 2000 to 2006, he was with the
U.S. Securities & Exchange Commission as a senior counsel in
the Division of Enforcement where he investigated and prosecuted
enforcement matters involving broker-dealers, investment advisers,
hedge
funds and public companies.
|
none
|
|||
Biographical
information
Directors
Our
directors have been divided into two groups —
independent directors and interested
directors. Interested directors are interested persons as defined in the
1940
Act.
Independent
directors
Peter
K.
Barker —
Mr. Barker is currently a
private
investor. After spending 28 years
at Goldman,
Sachs & Co., Mr. Barker stepped down as a General Partner in 1998
and as an Advisory Director in 2002. Mr. Barker headed Goldman,
Sachs & Co.’s
investment banking activities on the
West Coast from 1978 to 1998. Mr. Barker joined Goldman,
Sachs &
Co. in 1971. Mr. Barker began his
career in the London
office, then spent seven years in the
New York Corporate Finance Department before assuming his responsibilities
on
the West Coast. Mr. Barker has been active in several civic organizations,
including
the Los Angeles Area Boy Scout Council,
Los Angeles Metropolitan YMCA, Claremont McKenna College
and the Phoenix House of California. He
has also been a member of the California State Senate Commission on Corporate
Governance and is currently a director of
Avery Dennison Corporation.
Mr. Barker graduated from the University
of Chicago’s
Graduate School of Business with a
M.B.A. degree.
Steven
M.
Looney —
Mr. Looney is a Managing Director
of Peale Davies & Co. Inc., a consulting firm with particular
expertise in financial
process and IT outsourcing, and is a CPA and an attorney. Mr. Looney also
serves as a consultant and director to numerous companies in the healthcare,
manufacturing and technology services industries, including Sun Healthcare, WH
Industries, APW Ltd., and
Vein Associates of America, Inc. Between 2000 and
2005, he served as
Senior
Vice President and Chief Financial
Officer of PCCI, Inc., a private
IT staffing and outsourcing firm.
Between 1992 and 2000, Mr. Looney worked at WH Industries as Chief Financial and
Administrative
Officer. Mr. Looney graduated summa cum laude from the University
of Washington
with a B.A. degree in Accounting and
received a J.D. from the University of Washington School of Law where he
was a
member of the law review.
Charles
S.
Whitman III —
Mr. Whitman is senior counsel
(retired) at Davis
Polk & Wardwell. Mr. Whitman was a partner in Davis
Polk’s
Corporate Department for
28 years,
47
representing
clients in a broad range of
corporate finance matters, including shelf registrations, securities
compliance for
financial institutions, foreign asset privatizations, and mergers and
acquisitions. From 1971 to 1973, Mr. Whitman served as Executive Assistant
to three successive Chairmen of the U.S. Securities and Exchange
Commission.
Mr. Whitman serves on the
Legal Advisory Board of the National Association of Securities Dealers.
Mr. Whitman graduated from Harvard College
and graduated magna cum laude from
Harvard Law School
with a LL.B. Mr. Whitman also
received an LL.M. from Cambridge University
in England.
G. Cabell
Williams —Mr. Williams
is currently the
Managing General Partner of Williams and Gallagher, a private
equity partnership located in
Chevy Chase,
Maryland.
In 2004 Mr. Williams concluded a
23 year career
at Allied Capital Corporation,
a $4 billion
business development corporation based in Washington,
DC.
While at Allied, Mr. Williams
held a variety of positions including President, COO and finally Managing
Director following Allied’s
merger with its affiliates in
1998.
From 1991 to 2004, Mr. Williams
either led or co-managed the firm’s
Private
Equity Group. For the nine years prior
to 1999, Mr. Williams led Allied’s
Mezzanine investment activities. For
15 years, Mr. Williams served on Allied’s
Investment Committee where
he was responsible for reviewing and
approving all of the firm’s
investments. Prior to 1991,
Mr. Williams ran Allied’s
Minority Small Business Investment
Company. He also founded Allied Capital Commercial Corporation, a real estate
investment vehicle. Mr. Williams
has served on the
board of various public and private
companies. Mr. Williams attended
The Landon School, and graduated from Mercersburg Academy
and Rollins College,
receiving a B.S. in Business
Administration from the latter.
Interested
directors
Thomas
V.
lnglesby —
Mr. Inglesby is the Chief
Executive Officer of GSC Investment Corp. Mr. Inglesby joined GSC Group at
its inception in 1999 and is currently a Senior
Managing Director. From 1997 to 1999,
Mr. Inglesby was a Managing Director at Greenwich Street Capital
Partners.
Prior to that, Mr. Inglesby was a Managing Director with Harbour Group in
St. Louis,
Missouri,
an investment firm specializing in the
acquisition of manufacturing companies in fragmented industries. In 1986,
Mr. Inglesby
joined PaineWebber and was a Vice
President in the Merchant Banking department from 1989 to 1990.
Mr. Inglesby graduated with honors from the University
of Maryland
with a B.S. degree in Accounting, from
the University of Virginia School of Law with a J.D.
degree and from the Darden Graduate
School of Business Administration with a M.B.A.
degree.
Richard
M.
Hayden —
Mr. Hayden is the Chairman of GSC
Investment Corp. Mr. Hayden joined GSC Group in 2000 and is currently a
Vice Chairman of GSC Group, head of the corporate credit
group and a
member of the firm management committee. Mr. Hayden was previously with
Goldman, Sachs & Co. from 1969 until 1999 and was named
a Partner in 1980. Mr. Hayden
transferred to London
in 1992, where he was a Managing
Director and the Deputy
Chairman of Goldman, Sachs & Co. International Ltd., responsible for
all European investment banking activities. Mr. Hayden was also Chairman of
the Credit Committee from 1991 to 1996, a member of the firm’s
Commitment Committee from 1990
to
1995, a member of the firm’s
Partnership Committee from 1997 to
1998 and a member of the Goldman, Sachs & Co. International Executive
Committee from 1995 to 1998. In 1998, Mr. Hayden retired from Goldman,
Sachs & Co. and was retained as an Advisory Director
to consult in the Principal
Investment Area. Mr. Hayden is a non-executive director of COFRA Holdings,
AG and Deutsche Boerse AG. Mr. Hayden is also a member of The Wharton
Business School International Advisory Board. Mr. Hayden graduated magna
cum laude
and Phi Beta Kappa from Georgetown University
with a B.A. degree in Economics, and
graduated from The Wharton School with a M.B.A.
degree.
48
Robert
F. Cummings,
Jr. —
Mr. Cummings joined GSC Group in
2002 and is currently a Senior
Managing Director, Chairman of the Risk & Conflicts
Committee and the Valuation Committee and a member of the firm management
committee. Mr. Cummings is a former member of the GSC Advisory Board. For
the prior 28 years, Mr. Cummings was with Goldman, Sachs &
Co., where he was a
member of the Corporate Finance
Department, advising corporate clients on financing, mergers and acquisitions,
and strategic financial issues. Mr. Cummings was named a Partner of
Goldman, Sachs & Co.
in 1986. Mr. Cummings retired in
1998 and was retained
as an Advisory Director by Goldman,
Sachs & Co. to work with certain clients on a variety of banking
matters. Mr. Cummings is a director of GSC Capital Corp., Precision
Partners Inc., RR Donnelley and Sons Co., Corning Inc., Viasystems Group
Inc.,
and a member
of the Board of Trustees of Union
College. Mr. Cummings graduated from Union College
with a B.A. degree and from the
University
of Chicago
with a M.B.A.
degree.
Executive
officers who are not
directors
David
L. Goret, Vice
President and Secretary —
Mr. Goret joined GSC Group in 2004
as Managing
Director,
General
Counsel
and Chief
Compliance
Officer
and became a Senior Managing
Director
in January 2007. He manages
legal, compliance and certain administrative functions at GSC Group, and has
significant expertise
in a wide range of legal
matters. From 2000 to 2002, Mr. Goret served as Managing
Director
and General
Counsel
of Hawk Holdings, LLC, which
focused on creating, financing and operating emerging technology infrastructure
and service businesses.
From 2002 to 2003, he served as Senior Vice
President
and General
Counsel
of Mercator Software, Inc., a
Nasdaq-listed software company. Mr. Goret graduated magna cum laude from
Duke University
with a B.A. degree in Religion and
Political Science and from
the University
of Michigan
with a J.D.
degree.
Richard
T.
Allorto, Jr., Chief Financial Officer —
Mr. Allorto joined GSC Group in
2001 and is responsible for overseeing the financial statement preparation
and
accounting operations relating to the corporate credit group division’s
funds managed by GSC Group.
Mr. Allorto was previously with Schering Plough Corp. from 1998 to 2001
where he worked as an Audit Supervisor within the internal audit group with
a
focus on operational audits of the company’s
international
subsidiaries. From 1994 to
1998, he was with Arthur Andersen as a Supervising Audit Senor
with a manufacturing industry focus.
Mr. Allorto graduated from Seton Hall University
with a B.S. degree in Accounting and is
a licensed CPA.
Michael
J.
Monticciolo,
Chief Compliance
Officer —
Mr. Monticciolo joined GSC Group
in 2006. He was previously with the U.S. Securities & Exchange
Commission as a Senior
Counsel
in the Division of Enforcement
from 2000 to 2006 where he investigated and prosecuted enforcement matters involving
broker-dealers,
investment advisers, hedge funds and public companies. Prior to that,
Mr. Monticciolo was a Staff
Attorney
with the Commission’s
Office of Compliance Inspections and
Examinations from 1998 to 2000. Mr. Monticciolo graduated from the Ohio State University
with a B.A. degree in Political Science
and graduated from Hofstra University School of Law with a J.D.
degree.
Portfolio
Management
The
day-to-day management of the
Company’s
portfolio is the
responsibility of the corporate credit
group of GSC Group
and overseen by our investment committee. The corporate credit group’s
investment professionals collaborate
to manage the Company’s
portfolio and no one person is
primarily responsible for the day-to-day management of the
Company. Richard M. Hayden oversees
the corporate credit group of GSC Group and,
together with Thomas V. Inglesby, Seth
M. Katzenstein, Harvey E. Siegel, Alexander B. Wright, John R. Kline and
David
B.
49
Thompson
Jr.,
has
the most significant
responsibility for the
day-to-day management of the Company’s
portfolio.
Information
regarding our portfolio
managers who are not directors or officers is as
follows:
Seth
M.
Katzenstein —
Mr. Katzenstein joined GSC Group
at its inception in 1999 and is currently a Managing Director
of the corporate
credit group. He was with Greenwich Street Capital Partners from 1998 to
1999 as
an associate. Prior to 1998, Mr. Katzenstein was with Salomon Smith Barney
Inc., in the Financial Institutions Group, where he worked on a
variety of financing and advisory
transactions. Mr. Katzenstein graduated with High Distinction from the
University
of Michigan
with a B.B.A.
degree.
Harvey
E.
Siegel —
Mr. Siegel joined GSC Group in
2002 and is currently a Managing Director of the corporate credit group.
Mr. Siegel was
previously with IBJ Whitehall Bank & Trust Company from 1982 to 2002,
where he most recently held the position of Senior
Vice President and Head of the Loan
Workout Department. From 1980 to 1982, he was Associate General Counsel at Belco Petroleum
Corporation.
From 1978 to 1980, he was Vice President and Deputy General Counsel at
Studebaker-Worthington, Inc. From 1969 to 1978, he was with Fried, Frank,
Harris, Shriver & Jacobson as an associate in the corporate finance
and
M&A practice groups.
Mr. Siegel graduated from City College of New York with a B.A. degree in
Political Science, and from Columbia University School of Law with a J.D.
degree.
Alexander
B.
Wright —
Mr. Wright joined GSC Group in
2002 and is currently a
Managing Director of the corporate credit group. He was previously with IBJ
Whitehall Bank & Trust Corporation, in the Media &
Communications Group, where he sourced, underwrote, and restructured
senior
debt financings from 1995 to 2002. In
addition, Mr. Wright
acted as a Portfolio Manager for IBJ Whitehall’s
equity investment portfolio from
1999
to 2002. Prior to 1995, Mr. Wright
worked at Chemical Banking Corporation as an analyst. Mr. Wright graduated
from Rutgers College
with a B.A. degree in
Political Science and a
minor in Economics, and from Fordham University
with a M.B.A.
degree.
John
R.
Kline —
Mr. Kline joined GSC Group in 2001
and is currently a
Vice President of the
corporate credit group. Mr. Kline is responsible for bond and loan trading
within the corporate
credit
group. Prior to 2001, he was with Goldman, Sachs & Co. in the Credit
Risk Management and Advisory Group, where he was involved in capital structure
analysis and credit risk management. Mr. Kline graduated from Dartmouth College,
with
an A.B. degree in
History.
David
B. Thompson
Jr. —
Mr. Thompson joined GSC Group in
2002 and is currently a Vice President of the corporate credit group. Prior
to
joining GSC Group, Mr. Thompson was with Goldman, Sachs & Co. in
the Bank Debt Portfolio Group, where he worked
on a variety of
leveraged loan transactions. From 2000 to 2002, Mr. Thompson was in the
Credit Risk Management and Advisory Group of Goldman, Sachs & Co. where
he was involved in capital structure analysis and credit
risk management. Mr. Thompson graduated
from the
University
of Pennsylvania
with a B.A. degree in
Economics.
Committees
of the board of
directors
Audit
committee
The
audit committee is made up of Steven
M. Looney, Charles S. Whitman III and G. Cabell
Williams. Steven
M. Looney serves as the audit committee chairman. The audit committee is
responsible for
approving our independent accountants, reviewing with our independent
accountants the plans and results of the audit engagement, approving
professional services provided by our independent
accountants,
reviewing the independence of our independent
50
accountants
and reviewing the adequacy
of our internal accounting controls. The audit committee is also responsible
for
aiding our board of directors in determining the fair value of debt
and equity investments that are
not publicly traded or for which current market values are not readily
available; where appropriate, the board of directors and audit committee
may
utilize the services of an independent valuation firm to assist them in
determining
the fair value of these
investments.
Nominating
and Corporate
Governance committee
The
nominating committee is made up of
Charles S. Whitman III, Peter K. Barker and G. Cabell
Williams. Charles S. Whitman III serves as the nominating
committee
chairman. The
nominating committee is responsible for selecting, researching and nominating
directors for election by our stockholders, selecting nominees to fill vacancies
on the board of directors or a committee of the board of directors, developing
and recommending to the
board of directors a set of corporate governance principles and overseeing
the
evaluation of the board of directors.
Compensation
committee
The
compensation committee is made up of
G. Cabell Williams, Peter K. Barker and Steven M. Looney. G. Cabell
Williams serves as the compensation committee chairman. The
compensation committee
consists
entirely of independent directors. The
compensation committee oversees our compensation policies generally, makes
recommendations to the board of directors with respect to our incentive
compensation and
equity-based plans that are subject to the approval of our board of directors,
evaluates executive officer performance and reviews our management succession
plan, oversees and sets compensation, if any, for our executive officers,
and prepares the report on
executive officer compensation, if applicable, that Securities and Exchange
Commission rules require to be included in our annual proxy statement.
Currently, none of our executive officers are compensated by the
Company.
Director
compensation
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.”
|
Executive
Compensation
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
following table sets forth certain
ownership information with respect to our common stock as of May
1, 2007 for
those persons who directly or
indirectly own, control or hold with the power to vote, 5% or more of
our outstanding shares
of
common stock and all officers and directors,
as a
group.
51
|
Percentage
of Common Stock Outstanding
|
|||||||||
|
Name
and Address
|
Type
of Ownership
|
Shares
Owned
|
Percentage
|
||||||
|
GSC
Group(1)
|
Record
and beneficial
|
960,021
|
11.6% | ||||||
|
All
officers and directors as a group (10 persons)(2)
|
Record
and beneficial
|
68,380
|
0.8% | ||||||
_______________
|
(1)
|
Includes
common stock held by affiliates of GSC Group as follows: 66 ⅔ shares of
common stock held by GSC Secondary Interest Company LLC, a Delaware
limited liability company, 54,975 shares of common stock held by
Greenwich
Street Capital Partners II, L.P., a Delaware limited partnership,
and
904,980 shares of common stock, held by GSC CDO III, L.L.C., a Delaware
limited liability company.
|
|
(2)
|
The
address for all officers and directors is c/o GSC Investment Corp.,
12
East 49th Street, New York, New York
10017.
|
The
following table sets forth the
dollar range of our equity securities beneficially owned by each of our
directors as of March 23,
2007. We are not part of
a
“family of
investment
companies,” as that term is
defined in the 1940 Act.
|
Name
of
Director
|
Dollar Range
of
Equity
Securities
in GSC Investment
Corp.(1)
|
|
|
Independent
Directors
|
||
|
Peter
K
Barker
|
$10,001-$50,000
|
|
|
Steven
M.
Looney
|
$1-$10,000
|
|
|
Charles
S.
Whitman III
|
none
|
|
|
G.
Cabell
Williams
|
over
$100,000
|
|
|
Interested
Directors
|
||
|
Thomas
V.
Inglesby
|
over
$100,000
|
|
|
Richard
M.
Hayden
|
over
$100,000
|
|
|
Robert
F.
Cummings, Jr.
|
None
|
_______________
|
(1)
|
Dollar
ranges are as follows: None, $1-$10,000, $10,001-$50,000,
$50,001-$100,000, or over $100,000.
|
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Conflicts
of
Interest
The
investment adviser has built a
professional working environment, a firm-wide compliance culture and compliance
procedures and systems designed to protect against
potential
incentives that may favor one account over another. The investment adviser
has
adopted policies and procedures that address the allocation of investment
opportunities, execution of portfolio transactions, personal trading
by employees and other potential
conflicts of interest that are designed to ensure that all client accounts
are
treated equitably over time. Nevertheless, the investment adviser furnishes
advisory services to numerous clients in addition to the Company, and
the investment adviser may,
consistent with applicable law, make investment recommendations to other
clients
or accounts (including accounts that are hedge funds or have performance
or
higher fees paid to the investment adviser or in which portfolio managers
have a personal interest in the
receipt of such fees) that may be the same as or different from those made
to
the Company. In addition, the investment adviser, its affiliates and any
officer, director, stockholder or employee may or may not have an interest
in the securities whose purchase
and sale the investment adviser recommends to the Company. Actions with respect
to securities of the same kind may be the same as or different from the action
that the investment adviser, or any of its affiliates, or
any officer, director, stockholder,
employee or any member of their families may take with respect to the same
securities. Moreover, the investment adviser may refrain from rendering any
advice or services concerning securities of companies of which any of
the investment
52
adviser’s
(or its affiliates’)
partners, officers, directors or
employees are directors or officers, or companies as to which the investment
adviser or any of its affiliates or the partners, officers, directors and
employees of any of them
has any substantial economic interest
or possesses material non-public information. In addition to its various
policies and procedures designed to address these issues, the investment
adviser
includes disclosure regarding these matters to its clients in both
its Form ADV and investment
advisory agreements.
The
investment adviser, its affiliates
or their officers and employees similarly serve or may similarly serve entities
that operate in the same or related lines of business. Accordingly, these
individuals may have
obligations to investors in those entities or funds or to other clients,
the
fulfillment of which might not be in the best interests of the Company. As
a
result, the investment adviser will face conflicts in the allocation of
investment opportunities
to the Company and other funds
and clients. In order to enable such affiliates to fulfill their fiduciary
duties to each of the clients for which they have responsibility, the investment
adviser will endeavor to allocate investment opportunities in
a fair and equitable manner which may,
subject to applicable regulatory constraints, involve pro rata co-investment
by
the Company and such other clients or may involve a rotation of opportunities
among the Company and such other clients.
While
the investment adviser does
not believe there
will be frequent conflicts of interest, if any, the investment adviser and
its
affiliates have both subjective and objective procedures and policies in
place
and designed to manage the potential conflicts of interest between
the investment adviser’s
fiduciary obligations to the Company
and their similar fiduciary obligations to other clients so that, for example,
investment opportunities are allocated in a fair and equitable manner among
the
Company and such other clients.
An investment opportunity that is
suitable for multiple clients of the investment adviser and its affiliates
may
not be capable of being shared among some or all of such clients due to the
limited scale of the opportunity or other factors, including regulatory
restrictions imposed by the 1940
Act. There can be no assurance that the investment adviser’s
or its affiliates’
efforts to allocate any particular
investment opportunity fairly among all clients for whom such opportunity
is
appropriate will result
in an allocation of all or part of such
opportunity to the Company. Not all conflicts of interest can be expected
to be
resolved in favor of the Company.
Certain Affiliations
Our
Chairman, Chief Executive Officer
and Vice President and Secretary also serve as senior
managers
of GSC Group. In addition, certain
of our directors
are senior
managers
of GSC Group. As a result, the
investment advisory and management agreement between us and our investment
adviser was negotiated between related parties, and the terms, including
fees payable, may
not be as favorable to us as if it had been negotiated with an unaffiliated
third party. See “Risk
Factors —
Risks related to our
business —
There are conflicts of interest in our
relationship with our investment adviser
and/or GSC Group, which could result
in decisions that are not in the best interests of our stockholders” and “Risk
Factors —
Risks related to our
business —
Our investment adviser’s
liability will be limited under the
investment advisory and management
agreement, and we will indemnify our
investment adviser against certain liabilities, which may lead our investment
adviser to act in a riskier manner on our behalf that it would when acting
for
its own account.”
We
have entered into a license agreement
with GSC Group, pursuant
to
which GSC Group grants us a non-exclusive, royalty-free license to use the
“GSC”
name.
As
a
result of regulatory restrictions, we are not permitted to invest in any
portfolio company in which GSC Group or any affiliate currently has an
investment. We may in the future submit an exemptive application to the SEC
to
permit greater flexibility to negotiate the terms of
53
co-investments
because we believe that it will be advantageous for the Company to co-invest
with funds managed by GSC Group where such investment is consistent with
the
investment objectives, investment positions, investment policies, investment
strategies, investment restrictions, regulatory requirements and other pertinent
factors applicable to the Company. There is no assurance that an application
for
exemptive relief would be granted by the SEC. Accordingly, we cannot assure
you
that we will be permitted to co-invest with funds managed by GSC
Group.
|
Principal
Accountant Fees and
Services
|
The
following table presents fees for professional audit services rendered by Ernst
& Young LLP for the audit of the Company’s annual financial statements as of
February 28, 2007 and for the period from May 12, 2006 (inception) to
February 28, 2007 and fees billed for other services rendered by Ernst &
Young LLP through February 28, 2007.
|
Audit
Fees (1)
|
$
|
25,000
|
|
Aggregate
Non-Audit Fees
|
||
|
Audit-Related
Fees (2)
|
35,000
|
|
|
Tax
Fees (3)
|
||
|
All
Other Fees
|
||
|
Total
Aggregate Non-Audit Fees (4)
|
35,000
|
|
|
Total
Fees
|
$
|
60,000
|
|
(1)
|
Audit
fees represent fees and expenses for the audit of the Company’s annual
financial statements.
|
|
(2)
|
Audit-related
fees represent services in conjunction with the Company’s initial public
offering and registration statement and this annual report on Form
10-K.
|
|
(3)
|
Tax
fees represent services in conjunction with preparation of the Company’s
tax return.
|
|
(4)
|
Aggregate
non-audit fees comprise audit-related fees, tax fees and all other
fees.
|
The
Audit
Committee has concluded the provision of the non-audit services listed above
is
compatible with maintaining the independence of Ernst & Young
LLP.
54
|
Exhibits
and Financial Statement
Schedules
|
1.
Financial Statements
The
following financial statements of GSC Investment Corp. (the “Company” or the
“Registrant”) are filed herewith:
|
Statement
of Assets, Liabilities, and Member's Capital as of February 28,
2007
|
|
F-3
|
|
Statement
of Operations for the period from May 12, 2006 (date of inception)
to
February 28, 2007
|
|
F-4
|
|
Statement
of Members Capital for the period from May 12, 2006 (date of inception)
to February 28, 2007
|
|
F-5
|
|
Statement
of Cash Flows for the period from May 12, 2006 (date of inception)
to
February 28, 2007
|
F-6
|
|
|
Statement
of Changes in Net Assets for the period from May 12, 2006 (date of
inception) to February 28, 2007
|
|
F-7
|
|
Notes
to Financial Statements
|
|
F-8
|
2.
Exhibits
EXHIBIT
INDEX
|
Exhibit
Number
|
|
Description
|
|
3.1
|
|
Form
of Charter of GSC Investment
Corp.*********
|
|
3.2
|
|
Form
of
Bylaws of GSC Investment
Corp.*********
|
|
4.1
|
|
Specimen
certificate of GSC
Investment Corp.’s
common stock, par value $0.0001
per share.*********
|
|
4.2
|
|
Form
of Registration Rights
Agreement
dated , 2007
between GSC Investment Corp., GSC CDO III
L.L.C., GSCP (NJ)
L.P. and the other investors party thereto.***
|
|
4.3
|
|
Form
of Dividend Reinvestment
Plan.*******
|
|
10.1
|
|
Form
of Investment Advisory and
Management Agreement
dated , 2007
between GSC Investment LLC and GSCP (NJ)
L.P.*******
|
|
10.2
|
|
Form
of Custodian Agreement
dated , 2007
between GSC Investment LLC
and .*******
|
|
10.3
|
|
Form
of Regulations of American
Stock Transfer and Trust Company.***
|
|
10.4
|
|
Form
of Administration Agreement
dated , 2007
between GSC Investment Corp. and GSCP (NJ) L.P.*
|
55
|
10.5
|
|
Form
of Trademark
License Agreement
dated , 2007
between GSC Investment Corp. and GSCP (NJ)
L.P.*******
|
|
10.6
|
|
Contribution
and Exchange
Agreement dated October 17, 2006 among
GSC
Investment LLC, GSC CDO III, L.L.C., GSCP (NJ), L.P., and the other
investors party thereto.*******
|
|
10.7
|
|
Portfolio
Acquisition Agreement
dated March 21, 2007 between GSC Investment Corp. and GSC Partners
CDO Fund
III,
Limited.*******
|
|
10.8
|
|
Form
of Indemnification Agreement
dated , 2007
between GSC Investment LLC and each officer and director of GSC Investment
LLC.*******
|
|
10.9
|
|
Form
of Indemnification Agreement
dated , 2007
between GSC Investment LLC and each investment
committee
member of GSCP (NJ) L.P.*******
|
|
10.10
|
|
Collateral
Management Agreement
dated November 5, 2001 among GSC Partners CDO Fund III,
Limited and GSCP (NJ),
L.P.*****
|
|
10.11
|
|
Amended
and Restated Limited
Partnership Agreement
of GSC Partners CDO GP III, L.P. dated October 16,
2001.*****
|
|
10.12
|
|
Amended
and Restated Limited
Partnership Agreement of GSC Partners CDO Investors III, L.P. dated
August 27, 2001.*****
|
|
10.13
|
|
Form
of Amendment to the
Contribution and Exchange Agreement
dated , 2007
among GSC Investment LLC, GSC CDO III, L.L.C., GSCP (NJ), L.P., and
the other investors party thereto.**
|
|
10.14
|
|
Form
of Assignment and Assumption
Agreement
dated , 2007
among GSCP (NJ), L.P. and GSC Investment LLC.****
1
|
|
10.15
|
|
Form
of Notification of Fee
Reimbursement
dated ,
2007.*
|
|
10.16
|
Form
of Amendment to
Investment Advisory and
Management Agreement
dated May 23, 2007 between
GSC Investment Corp.
and
GSCP (NJ), L.P.
|
|
|
14.1
|
|
Code
of Ethics of the Company
adopted under Rule 17j-1.***
|
|
21.1
|
|
List
of Subsidiaries.
|
|
31.1
|
|
Chief
Executive Officer Certification Pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
Chief
Financial Officer Certification Pursuant to Rule 13a-14 of the Securities
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act
of 2002.
|
|
32.1
|
|
Chief
Executive Officer Certification pursuant to Section 1350, Chapter
63 of
Title 18, United States Code, as adopted pursuant to Section 906
of the
Sarbanes-Oxley Act of 2002.
|
|
32.2
|
|
Chief
Financial Officer Certification pursuant to Section 1350, Chapter
63 of
Title 18, United States Code, as adopted pursuant to Section 906
of the
Sarbanes-Oxley Act of 2002.
|
|
*
|
Incorporated
by reference to
Amendment No. 8 to GSC Investment Corp.’s
Registration Statement on
Form N-2, File No. 333-138051,
filed on March 23,
2007.
|
56
|
**
|
Incorporated
by reference to
Amendment No. 7
to GSC Investment Corp.’s
Registration Statement on
Form N-2, File No. 333-138051,
filed on March 22,
2007.
|
|
|
***
|
Incorporated by reference to Amendment No. 6 to GSC Investment Corp.’s Registration Statement on Form N-2, File No. 333-138051, filed on March 22, 2007. | |
|
****
|
Incorporated
by reference to
Amendment No. 5 to GSC Investment LLC’s
Registration Statement on Form
N-2, File No. 333-138051,
filed on March 8,
2007.
|
|
|
*****
|
Incorporated
by reference to
Amendment No. 4
to GSC Investment LLC’s
Registration Statement on
Form N-2, File No. 333-138051,
filed on February 23,
2007.
|
|
|
******
|
Incorporated
by reference to
Amendment No. 3 to GSC Investment LLC’s
Registration Statement on
Form N-2, File No. 333-138051,
filed on February 7,
2007.
|
|
|
*******
|
Incorporated by reference to Amendment No. 2 to GSC Investment LLC’s Registration Statement on Form N-2, File No. 333-138051, filed on January 12, 2007. | |
|
********
|
Incorporated
by reference to
GSC Investment
LLC’s
Registration Statement on
Form N-2, File No. 333-138051,
filed on December 1,
2006.
|
|
|
*********
|
Incorporated
by reference to GSC
Investment Corp’s
Registration Statement on
Form 8-A, File No. 001-333-76, filed on March 21,
2007.
|
57
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
|
GSC
Investment CORP.
|
|||
|
Date: May
24, 2007
|
|
By
|
|
/s/
Thomas V. Inglesby
|
|
|
|
Thomas
V. Inglesby
Director
and Chief Executive Officer, GSC Investment
Corp.
|
||
* * * * *
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
/s/
Richard M. Hayden
|
||||
|
RICHARD
M.
HAYDEN
|
|
Chairman
of the Board of
Directors
|
|
May
24, 2007
|
|
/s/
Thomas V. Inglesby
|
||||
|
THOMAS
V.
INGLESBY
|
|
Director
and Chief Executive
Officer
|
|
May
24, 2007
|
|
/s/
Richard T. Allorto, JR.
|
||||
|
RICHARD
T.
ALLORTO,
JR.
|
|
Chief
Financial Officer and Chief
Accounting Officer
|
|
May
24, 2007
|
|
/s/
Robert F. Cummings, JR.
|
||||
|
ROBERT
F. CUMMINGS,
JR.
|
|
Member
of the Board of Directors
|
|
May
24, 2007
|
|
/s/
Peter K. Barker
|
||||
|
PETER
K.
BARKER
|
|
Member
of the Board of Directors
|
|
May
24, 2007
|
|
/s/
Steven M. Looney
|
||||
|
STEVEN
M.
LOONEY
|
|
Member
of the Board of Directors
|
|
May
24, 2007
|
|
/s/
Charles S. Whitman III
|
||||
|
CHARLES
S. WHITMAN
III
|
|
Member
of the Board of Directors
|
|
May
24, 2007
|
|
/s/
G. Cabell Williams
|
||||
|
G.
CABELL
WILLIAMS
|
|
Member
of the Board of Directors
|
|
May
24, 2007
|
58
|
Report
of Independent Registered Public Accounting Firm
|
|
F-
2
|
|
Statement
of Assets, Liabilities, and Member’s Capital as of February 28,
2007
|
|
F-
3
|
|
Statement
of Operations for the period from May 12, 2006 (date of inception)
to
February 28, 2007
|
|
F-
4
|
|
Statement
of Member’s Capital for the period from May 12, 2006 (date of inception)
to February 28, 2007
|
|
F-
5
|
|
Statement
of Cash Flows for the period from May 12, 2006 (date of inception)
to
February 28, 2007
|
|
F-
6
|
|
Statement
of Changes in Net Assets for the period from May 12, 2006 (date of
inception) to February 28, 2007
|
|
F-7
|
|
Notes
to Financial Statements
|
|
F-8
|
 |
 |
Ernst
& Young LLP
5
Times Square
New
York, New York
|
|
Phone:
(212) 773-3000
www.ey.com
|
Report
of
Independent Registered Public Accounting Firm
To
the
Management of GSC Investment LLC:
We
have
audited the accompanying statement of assets, liabilities and member’s capital
of GSC Investment LLC (the “Company”) as of February 28, 2007, and the related
statements of operations, cash flows and Members’ capital for the period from
May 12, 2006 (inception) to February 28, 2007. These financial statements
are
the responsibility of the Company's management. Our responsibility is to
express
an opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. We were not engaged to perform
an
audit of the Company’s internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as
a basis
for designing audit procedures that are appropriate in the circumstances,
but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes
assessing the accounting principles used and significant estimates made
by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of GSC
Investment LLC as of February 28, 2007 and the results of its operations,
changes in Members’ capital and its cash flows for the period from May 12, 2006
(inception) to February 28, 2007, in conformity with U.S. generally accepted
accounting principles.
 |
New
York,
New York
May
18,
2007
A
Member Practice of Ernst & Young Global
F-2
|
GSC
Investment
LLC
|
|||||
|
Statement
of Assets, Liabilities,
and Member's Capital
|
|||||
|
February
28,
2007
|
|||||
|
Assets
|
|||||
|
Deferred
offering
costs
|
$ |
808,617
|
|||
|
Cash
|
1,030
|
||||
|
Total
assets
|
$ |
809,647
|
|||
|
Liabilities
and member's
capital
|
|||||
|
Accrued
offering
costs
|
$ |
760,000
|
|||
|
Accrued
expenses
|
105,000
|
||||
|
Due
to
affiliate
|
73,810
|
||||
|
Total
liabilities
|
938,810
|
||||
|
Member's
capital
|
|||||
|
Capital
contributed
|
1,000
|
||||
|
Accumulated
loss
|
(130,163 | ) | |||
|
Total
member's
capital
|
(129,163 | ) | |||
|
Total
liabilities and member's
capital
|
$ |
809,647
|
|||
|
See
accompanying
notes.
|
|||||
F-3
|
GSC
Investment
LLC
|
||||
|
Statement
of
Operations
|
||||
|
For
the period from May 12, 2006
(date of inception)
|
||||
|
to
February 28,
2007
|
||||
|
Income
|
||||
|
Interest
|
$ |
30
|
||
|
Expenses
|
||||
|
Organization
costs
|
$ |
95,193
|
||
|
Professional
fees
|
35,000
|
|||
|
Total
expenses
|
130,193
|
|||
|
Net
loss
|
$ | (130,163 | ) | |
|
See
accompanying
notes.
|
||||
F-4
|
GSC
Investment
LLC
|
||||
|
Statement
of Member's
Capital
|
||||
|
For
the period from May 12, 2006
(date of inception)
|
||||
|
to
February 28,
2007
|
||||
|
Member's
capital, May 12,
2006
|
-
|
|||
|
Capital
contributions
|
1,000
|
|||
|
Net
loss
|
(130,163 | ) | ||
|
Member's
capital, February 28,
2007
|
$ | (129,163 | ) | |
|
See
accompanying
notes.
|
||||
F-5
|
GSC
Investment
LLC
|
||||
|
Statement
of
Cash Flows
|
||||
|
For
the period from May 12, 2006
(date of inception)
|
||||
|
to
February 28,
2007
|
||||
|
Cash
flows from operating
activities
|
||||
|
Net
loss
|
$ | (130,163 | ) | |
|
Adjustments
to reconcile net loss
to net cash and cash equivalents from operating
activities:
|
||||
|
Increase
in deferred offering
costs
|
(808,617 | ) | ||
|
Increase
in accrued deferred
offering costs
|
760,000
|
|||
|
Increase
in due to
affiliate
|
73,810
|
|||
|
Increase
in accrued
expenses
|
105,000
|
|||
|
Net
cash and cash equivalents from
operating activities
|
30
|
|||
|
Cash
flows from financing
activities
|
||||
|
Contribution
from
Member
|
1,000
|
|||
|
Net
cash and cash equivalents
provided by financing activities
|
1,000
|
|||
|
Net
change in
cash
|
1,030
|
|||
|
Cash,
beginning of
period
|
-
|
|||
|
Cash,
end of the
period
|
$ |
1,030
|
||
|
See
accompanying
notes.
|
||||
F-6
|
GSC
Investment
LLC
|
||||
|
Statement
of Changes in Net
Assets
|
||||
|
For
the period from May 12, 2006
(date of inception)
|
||||
|
to
February 28,
2007
|
||||
|
For
the period
from
|
||||
|
May
12, 2006 (date of
inception)
|
||||
|
to
February 28,
2007
|
||||
|
Operations:
|
||||
|
Net
operating
loss
|
$ | (130,163 | ) | |
|
Net
decrease in net assets
resulting from operations
|
(130,163 | ) | ||
|
Capital
share
transactions:
|
||||
|
Issuance
of common
stock
|
1,000
|
|||
|
Net
increase in net assets
resulting from capital share transactions
|
1,000
|
|||
|
Total
increase (decrease) in net
assets
|
(129,163 | ) | ||
|
Net
assets at beginning of
period
|
-
|
|||
|
Net
assets at end of
period
|
$ | (129,163 | ) | |
|
Net
asset value per common
share
|
N/A
|
|||
|
Common
shares outstanding at end
of period
|
67
|
|||
|
See
accompanying
notes.
|
||||
F-7
NOTES
TO FINANCIAL STATEMENTS
As
of February 28, 2007
1.
Organization
GSC
Investment, LLC (the “LLC”) was organized in May 2006 as a Maryland limited
liability company. The LLC is a newly organized non-diversified closed-end
management investment company and has elected to be regulated as a business
development company (“BDC”) under the Investment Company Act of 1940, as amended
(the “1940 Act”). As of February 28, 2007, the LLC had not yet commenced its
operations and investment activities.
On
March 21, 2007,
GSC Investment Corp. (which
is referred to
as the “Company”, “we” and “us”) was
incorporated in
Maryland and concurrently, the LLC
was
merged with and into the Company 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 common share of the LLC was
converted into an equivalent number of shares of common stock of the Company
and
the Company is the surviving entity.
The
LLC’s
and the Company’s, as the surviving entity, operations will be externally
managed and advised by our investment adviser, GSCP (NJ), L.P. (individually
and
collectively with its affiliates, “GSC Group” or the “Manager”), pursuant to an
investment advisory and management agreement.
2.
Significant Accounting Policies
Basis
of Presentation
The
financial statements have been prepared in accordance with U.S generally
accepted accounting principles and are expressed in U.S. dollars.
Use
of Estimates in Preparation of Financial Statements
The
preparation of financial statements in conformity with U.S generally accepted
accounting principles 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
revenues and expenses during the period reported. Actual results could differ
from those estimates.
Recent
Accounting Pronouncements
In
September 2006, the FASB released Statement of Financial Accounting Standards
No. 157 “Fair Value Measurements” (“FAS 157”). FAS 157 establishes an
authoritative definition of fair value, sets out a framework for measuring
fair
value, and requires additional disclosures about fair-value measurements. The
application of FAS 157 is required for fiscal years beginning after November
15,
2007 and interim periods within those fiscal years. At this time, management
is
evaluating the implications of FAS 157 and its impact on the financial
statements has not yet been determined.
Cash
and Cash Equivalents
F-8
The
LLC
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.
Deferred
Offering Cost
Deferred
offering costs consist principally of legal fees incurred by the LLC related
to
the Company’s IPO that was subsequently completed on March 28, 2007. These
offering costs will be charged directly against capital and are limited to
$1
million. Offering costs in excess of $1 million will be paid for by the Manager.
As of February 28, 2007, the LLC has accrued $808,617 relating to offering
costs.
Organizational
Expenses
Organizational
expenses consist principally of professional fees incurred in connection with
the organization of the LLC and have been expensed as incurred. The Manager
has
agreed to pay organizational expenses on behalf of the LLC, and to be
subsequently reimbursed through the proceeds of the IPO.
Income
Taxes
As
of
February 28, 2007, no provision for federal, state and local income taxes has
been made in the LLC financial statements, as the member is individually liable
for its own tax payments.
The
Company intends to elect and continue to qualify for the tax treatment
applicable to regulated investment companies under Subchapter M of the Internal
Revenue Code of 1986 (the "Code"), as amended, and among other things, intends
to continue to make the requisite distributions to its stockholders which will
relieve the Company from federal income taxes. Therefore, no provision has
been
recorded for federal income taxes.
In
order
to qualify as a RIC, among other factors, 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 federal excise tax of 4% if we do not distribute
at
least 98% of our investment company taxable income in any calendar year and
98%
of our capital gain net income for each one-year period ending on October
31.
In
July
2006, the Financial Accounting Standards Board (“FASB”) released FASB
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN
48”). FIN 48 provides guidance for how uncertain tax positions should be
recognized, measured, presented and disclosed in the financial statements.
FIN
48 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 not deemed to meet the more-likely-than-not threshold
would be recorded as a tax expense in the current year. Adoption of FIN 48
is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. At this time, management has
evaluated the implications of FIN 48 and has determined that all uncertain
tax
positions have been properly presented and disclosed in the financial
statements.
F-9
3.
Related Party Transactions
The
due to
affiliate balance of $73,810 includes amounts paid by the Manager on behalf
of
the LLC for certain organizational expenses and offering costs.
In
May
2006, GSC Secondary Interest Fund, LLC, an affiliated entity of GSC Group,
contributed $1,000 to the LLC in exchange for 66 2/3 shares, constituting all
of
the issued and outstanding shares of the LLC.
4.
Subsequent events
On
March 21, 2007,
GSC Investment Corp. was incorporated in Maryland and concurrently,
GSC Investment,
LLC was merged with and into the Company 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 common share of the LLC was
converted into an equivalent number of shares of common stock of the Company
and
the Company is the surviving entity. The Company is a non-diversified
closed-end management investment company that has elected to be regulated as
a
business development company (“BDC”) under the Investment Company Act of 1940,
as amended (the “1940 Act”).
On
March
21, 2007, the Company entered into an Investment Advisory and Management
Agreement (the “Management Agreement”) with the Manager pursuant to which the
Manager will act as the investment advisor to the Company and manage the
investment and reinvestment activities of the Company, subject to the
supervision of the board of directors of the Company. The Manager shall have
the
power and authority on behalf of the Company to effectuate investment decisions
for the Company, including the execution and delivery of all documents relating
to the Company’s investments and the placing of orders for other purchase or
sale transactions on behalf of the Company. The initial term of the Management
Agreement is 2 years and thereafter shall continue automatically for successive
annual periods, provided that such continuance is specifically approved at
least
annually by the vote of the board of directors, or by the vote of shareholders
holding a majority of the outstanding voting securities of the Company, and
the
vote of a majority of the Company’s Directors who are not parties to this
Agreement or “interested persons” (as such term is defined in Section 2(a)(19)
of the 1940 Act) of any party to this Agreement, in accordance with the
requirements of the 1940 Act.
Under
the
Management Agreement, the Company agrees to pay the Manager a base management
fee (“Base Management Fee”) and an incentive fee (“Incentive Fee”) for the
services provided. The Base Management Fee shall be calculated and payable
quarterly in arrears and is equal to 1.75% per annum of the Company’s total
assets (other than cash or cash equivalents but including assets purchased
with
borrowed funds). The Incentive Fee shall consist of two parts, the
“Pre-Incentive Fee” and “Capital Gains Fee”. The Pre-Incentive Fee is calculated
and payable quarterly in arrears based on the pre-incentive fee net investment
income for the quarter and is subject to a hurdle rate of 1.875% per quarter
(7.5% annualized). The Capital Gains Fee is calculated and payable as of the
end
of each fiscal year and is calculated by subtracting (i) the sum of the
Company’s cumulative aggregate realized capital losses and cumulative aggregate
unrealized capital depreciation from (ii) the Company’s cumulative aggregate
realized capital gains, in each case calculated from inception. If such amount
is positive at the end of such year, then the Capital Gains Fee for such year
is
equal to 20.0% of such amount, less the cumulative aggregate amount of Capital
Gains Fees paid in all prior years. If such amount is negative, then there
is no
Capital Gains Fee for such year.
F-10
On
March 28, 2007,
the Company completed its initial public offering of 7,250,000 shares of
common stock,
priced at $15.00 per share, before underwriting discounts and commissions
and
commenced its investment operations.
On
March
28, 2007 and April 2, 2007, pursuant to a portfolio acquisition agreement with
GSC Partners CDO Fund III, Limited, a Cayman Islands exempted company (“CDO Fund
III”) the Company purchased for cash a portfolio of first lien and second lien
loans, senior secured bonds and unsecured bonds held by CDO Fund III for
approximately $87 million and $11 million, respectively.
On
April
11, 2007, the Company and GSC Investment Funding LLC (“GSC Funding”), its wholly
owned subsidiary, entered into a purchase and sale agreement, pursuant to which
the Company agreed to sell to GSC Funding certain securities and loans
originated or purchased by the Company in its normal course of business and
the
related rights of payment thereunder and the interests of the Company in the
related property and other interest securing the payments to be made under
such
securities and loans.
Additionally
on April 11, the Company, as performance guarantor, GSC Funding, as borrower,
and the Manager, as servicer, entered into a credit agreement (the “Credit
Agreement”) with Deutsche Bank AG, New York branch, as administrative agent,
U.S. Bank National Association, as trustee and back-up servicer, and the
commercial paper lenders and financial institutions from time to time party
thereto. The Credit Agreement provides for a $85,000,000 revolving securitized
credit facility that may be increased up to $130,000,000 subject to satisfaction
of certain conditions. The interest rate on the revolving securitized
credit facility is based on the commercial paper rate plus 0.70%. The Credit
Agreement contains certain negative covenants, customary representations and
warranties, affirmative covenants and events of default. On May 1, 2007,
pursuant to Section 2.3(b) in the Credit Agreement, the facility amount was
increased to $100,000,000.
On
May 1,
2007, the Company and GSC Investment Funding II LLC (“GSC Funding II”), its
wholly owned subsidiary, entered into a purchase and sale agreement, pursuant
to
which the Company agreed to sell to GSC Funding II certain securities and loans
purchased by the Company and the related rights of payment thereunder and the
interests of the Company in the related property and other interest securing
the
payments to be made under such securities and loans.
On
May 1,
2007, the Company and GSC Partners CDO Fund Limited (“GSC CDO”) entered into a
purchase and sale agreement, pursuant to which GSC CDO agreed to sell to the
Company for cash a portfolio of first lien and second lien loans, senior secured
bonds, and unsecured bonds for approximately $58 million.
On
May 1,
2007, the Company, as performance guarantor, GSC Funding II, as borrower, and
GSCP (NJ), L.P., as servicer, entered into a credit agreement (the “GSC Funding
II Credit Agreement”) with Deutsche Bank AG, New York branch, as administrative
agent, U.S. Bank National Association, as trustee and back-up servicer, and
the
commercial paper lenders and financial institutions from time to time party
thereto. The GSC Funding II Credit Agreement provides for a $25,708,119 term
securitized credit facility. The GSC Funding II Credit Agreement
contains certain negative covenants, customary representations and warranties,
affirmative covenants and events of default.
On
May 1,
2007, the Company, as performance guarantor, GSC Funding, as borrower, and
the
Manager, as servicer, entered into Amendment No.1 to the Credit Agreement dated
April 11, 2007 with Deutsche Bank AG, New York branch, as the committed lender,
managing agent and administrative agent.
F-11
Exhibit
10.16
AMENDMENT
TO
INVESTMENT
ADVISORY AND MANAGEMENT AGREEMENT
BETWEEN
GSC
INVESTMENT CORP.
AND
GSCP
(NJ), L.P.
Amendment
made this 23rd day of May 2007 by and between GSC Investment Corp., a Maryland
corporation (the “Company”), and GSCP (NJ), L.P., a Delaware
limited partnership (the “Investment Adviser”).
WHEREAS,
the Company has retained the Investment Adviser to furnish investment advisory
services to the Company on the terms and conditions set forth in an Investment
Advisory and Management Agreement dated as of March 21, 2007 (the
“Advisory Agreement”); and
WHEREAS,
the Board of Directors has approved an amendment to the Advisory Agreement
to
reconcile the fee calculation dates with the financial reporting schedule of
the
Company;
NOW,
THEREFORE, in consideration of the premises and for other good and valuable
consideration, the parties hereby agree as follows:
Amendment
to Fee Calculation Dates. Section 3 of the Advisory Agreement is
hereby amended as follows: (i) each reference to "calendar quarter"
set forth in Section 3 is hereby replaced with "fiscal quarter" and each
reference to “calendar year” is hereby replaced with “fiscal year” and (ii) the
initial dates on which fees are payable under Section 3 are hereby changed
from
"June 30, 2007" to "August 31, 2007" with respect to the quarterly management
and incentive fees and from "December 31, 2007" to "February 28, 2008" with
respect to the annual incentive fee.
IN
WITNESS
WHEREOF, the parties hereto have caused this Amendment to be duly executed
on
the date hereof.
|
GSC
INVESTMENT CORP.
|
|||
|
|
By:
|
/s/ David L. Goret | |
| Name: David L. Goret | |||
| Title: Vice President and Secretary | |||
| GSCP (NJ), L.P. | |||
| By: | GSCP (NJ), Inc., | ||
|
its
General Partner
|
|||
|
|
By:
|
/s/ David L. Goret | |
| Name: David L. Goret | |||
| Title: Senior Managing Director and Secretary | |||
Exhibit
21.1
List
of Subsidiaries of GSC Investment Corp.
GSC
Investment Funding LLC
GSC
Investment Funding II LLC
Exhibit
31.1
CERTIFICATION
PURSUANT TO
RULE
13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE
ACT
OF 1934, AS AMENDED
I,
Thomas
V. Inglesby, certify that:
1. I
have reviewed this annual report on Form 10-K of GSC Investment
Corp.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the company as of, and for,
the periods presented in this report;
4. The
company’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the company and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the company, including its consolidated subsidiaries,
is
made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Paragraph
omitted pursuant to SEC Release Nos. 33-8238 and
34-47986;
(c) Evaluated
the effectiveness of the company’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d) Disclosed
in this report any change in the company’s internal control over financial
reporting that occurred during the company’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the company’s
internal control over financial reporting; and
5. The
company’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the company’s
auditors and the audit committee of the company’s board of directors (or persons
performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process,
summarize and report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
May
24, 2007
|
/s/
Thomas V. Inglesby
|
|
Thomas
V. Inglesby
|
|
Chief
Executive Officer
|
Exhibit
31.2
CERTIFICATION
PURSUANT TO
RULE
13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE
ACT
OF 1934, AS AMENDED
I,
Richard
T. Allorto, Jr., certify that:
1. I
have reviewed this annual report on Form 10-K of GSC Investment
Corp.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the company as of, and for,
the periods presented in this report;
4. The
company’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the company and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the company, including its consolidated subsidiaries,
is
made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Paragraph
omitted pursuant to SEC Release Nos. 33-8238 and
34-47986;
(c) Evaluated
the effectiveness of the company’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d) Disclosed
in this report any change in the company’s internal control over financial
reporting that occurred during the company’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the company’s
internal control over financial reporting; and
5. The
company’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the company’s
auditors and the audit committee of the company’s board of directors (or persons
performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process,
summarize and report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
May
24, 2007
|
/s/
Richard T. Allorto, Jr.
|
|
Richard
T. Allorto, Jr.
|
|
Chief
Financial Officer
|
Exhibit
32.1
CERTIFICATION
PURSUANT TO
SECTION
1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
The
certification set forth below is being submitted in connection with the
accompanying annual report of GSC Investment Corp. on Form 10-K (the “Report”)
for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the
Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter
63 of Title 18 of the United States Code.
Thomas
V.
Inglesby, the Chief Executive Officer and Richard T. Allorto, Jr., the Chief
Financial Officer of GSC Investment Corp., each certifies that, to the best
of
his knowledge:
|
|
1.
|
the
Report fully complies with the requirements of Section 13(a) or 15(d)
of
the Exchange Act; and
|
|
|
2.
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of GSC
Investment Corp.
|
Date:
May
24, 2007
|
/s/
Thomas V. Inglesby
|
|
Name:
Thomas V. Inglesby
|
|
Chief
Executive Officer
|
|
/s/
Richard T. Allorto, Jr.
|
|
Name:
Richard T. Allorto, Jr.
|
|
Chief
Financial Officer
|