Description

GSC Investment Corp (GNV) is a Registered Investment Corporation (RIC) doing business as a Business Development Corporation (BDC). As a RIC and a BDC, the company's operations are confined to making investments in the securities of "middle market" companies as defined by those companies having EBITDA between $5 and $50 million. In addition, the BDC must distribute 90% of its earnings each year. There have been several BDC's written up here including Apollo (AINV), Ares (ARCC) and MVC (MVC). In general, BDC's like GNV make loans to lesser credit quality companies, lever these assets up, charge a management fee for their services, and distribute a healthy stream of income. As a class, BDC's yield between 7% and 9% and trade at 115% of book NAV.

GSC Investment Corp went public in March of this year. Rather than doing a slow ramp-up to fully invested status, its manager liquidated a CDO which it had set up in 2001. As part of the liquidation, the manager exchanged its equity interest in the CDO for 1,041,317 shares of  GNV stock valued at $15 a share. After selling 7,250,000 shares to the public at $15 a share, there are now 8,291,317 shares outstanding. The proceeds of the offering were used to purchase $101 million of debt from the CDO. Subsequently, the company made further investments and as of May 21st had investments of $215 million against which it had borrowed $98 million. The investment portfolio generated an 11.5% weighted-average-yield. The portfolio is comprised of 14% first lien loans, 32% second lien loans, 19% senior secured high-yield bonds and 35% unsecured high yield bonds.

On May 21st, GNV declared a dividend of $0.24 "for the "stub" fiscal period beginning March 28,2007 and ending May 31, 2007."
I believe that the market did not pay close attention to the company's statement regarding the dividend. Bloomberg gives the company an "Indicated Yield" of 7.1% which would be correct if the dividend rate was $0.24 a quarter but incorrect if the dividend rate is $0.12 a month or $1.44 a year. In that case, the yield is 10.66% - a premium  to every other BDC in the market.

After the company's public offering,  net asset value per share was $14.02. At $13.50,  GNV shares trade at a very modest 3.7% discount to NAV. Almost all other BDC's trade at premiums to NAV of 115% and greater. As GNV's prospectus downplays any prospect of them making equity investments, a premium of 115% is probably a good target and should not be greater.

The management of GNV is top-notch. GNV is managed by GSCP, formerly known as Greenwich Street Capital Partners. They manage $22 billion across three areas - $8 billion in leveraged debt instruments, $1.3 billion in distressed debt, and $12.9 billion in real estate. GSCP employs 170 people of which about 70 are investment professionals and the rest support.  The most exciting aspect to GNV is the quality of their professionals. The chairman of GSCP is Alfred Eckert III a former Goldman Sachs partner. The chairman of GNV is Richard Hayden who was partner of Goldman Sachs from 1980 until 1999 and head of Goldman Sachs International. The president of GNV is Thomas Inglesby who was formerly of The Harbour Group in St. Louis and later Greenwich Street Capital. These are seriously talented and seriously rich investment professionals.  They did not take GNV public to have it be a $112 million market capitalization BDC.

Over the next 12 months, GNV should provide an investor with a 10% cash yield and a 10% - 20% increase in price to trade at a modest premium to NAV. While that 20% to 30% may not make your heart beat faster, it will pay for your groceries.

Catalyst

Recognition of the quality of GNV's management.
The declaration of the next dividend at a $0.36 quarterly rate.