Gladstone Investment Corp (GAIN) 2007 Q4 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Gladstone Investment fourth quarter 2008 financial results. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS).

It is now my pleasure to introduce your host, Mr. David Gladstone. Thank you, sir. You may begin.

Thank you, Ryan, and good morning to all of you. This is the quarterly conference call for shareholders and analysts for Gladstone Investment, trading symbol GAIN. We certainly thank you for calling in. We do enjoy these times we have with shareholders, we wish for a lot more of them. We do invite you to stop by our headquarters in McLean, Virginia if you're in the Washington, D.C. area and just say hello. You'll see a great team working for you. I think they're easily the best in the business.

I do need to read a statement about forward-looking statements. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to future performance of the company. These forward-looking statements inherently involve certain risks and uncertainties even though they are based on our current plans. We believe those plans to be reasonable. There are many factors that may cause our actual results to be materially different from our future results, that are expressed or implied in these forward-looking statements, including the factors listed under the caption risk factors in our periodic filings as filed with the Security and Exchange Commission and can be found on our website at www.gladstoneinvestment.com. And also on the SEC website. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

The year ending March 31st, 2008, was an okay year for our company, in terms of increasing our buyout assets. I think we'll do much better in the 2009 year that ends March 31st, 2009. We invest in two areas. As you know, we buy small businesses with our management teams. We call these our buyout portfolio. And we have invested in senior syndicated loans of large and middle market buyouts. Let's talk about each of those. The buyouts for the year for the year, we invested in three new buyouts for a total of approximately $48.4 million. We didn't exit from any buyouts this past year. And during the March quarter, I know some of the analysts like to follow it on a quarterly basis, for the quarter ending March 31st, 2008, we invested in one new buyout for approximately $10.6 million. Buyouts after the quarter, after the quarter ending March 31st, 2008, we invested in one new buyout for a total of approximately $5.75 million. And we haven't exited from any buyouts after the quarter end, either.

Syndicated loans during the year, we invested approximately 95 million in syndicated loans, but we did stop investing in the middle of the year as that marketplace became very, very volatile. However, during the year, we did receive repayments and sales of syndicated loans of about $32 million including normal amortization. And during the quarter ending March 31st, we received repayments and sales of syndicated loans of about $16.5 million, including some normal amortization. And we had a few other loans that paid down by about $4.5 million for a total in that quarter of $21 million in repayments for the quarter. After the quarter end, we didn't make any new syndicated loans, and at the end of March 31st we had about $196 million invested in buyouts and about $155 million invested in syndicated loans. At the end of the quarter, our investment portfolio was valued at $336 million and our cost was $351 million. So about 15 million down. The portfolio is valued at about 96% of cost, and most of that is from our valuations of our senior syndicated loans, and that marketplace has changed so much.

I do want to call your attention to a particular part of our valuation methodology that we use for our buyouts. We have a large ownership position. The valuation methodology we adopted for those investments is based on a multiple of unaudited earnings, or as we call it, EBITDA, and some people call it cash flow. Of that portfolio company, we believe this method valuing the company indicates what the business could be sold for, and when the company has a good cash flow, the value of that portfolio company will go up, and if the portfolio company has had some poor cash flows or certainly in cases where they have no earnings, the value will go down dramatically. Now, this is the way the stock market values businesses based on earnings, and so we're trying to mimic that. However, if a company is very low cash flows or even a loss, this method will result in a low value or even 0. This valuation methodology is very conservative when it comes to companies that have poor or no earnings, and this method of valuation will produce a lot of volatility in the value of the portfolio. That's our buyout portfolio, where we're actually buying the companies.

One example in our portfolio is the one company had a bad period due to some changes in the industry, and this valuation method dictated that we use 0 value for the note, the preferred stock, and the whole thing. So I personally don't think this investment is worthless, but we have to stick with the valuation technique that we adopted, and you have to use that consistently on all your investments. You can't pick and choose. And so all of you are forewarned there will be some volatility in the coming quarters as we use this technique for putting a value on our portfolio of companies in the buyout side. Since our inception in July of 2005, we've completed ten buyouts and since July 2005 we've made about 72 loans in the senior syndicated area for about $303 million.

At the end of the quarter, we had one syndicated loan past due with a balance of about $2.9 million. That company is in workout mode. All the lenders are involved in that. We are just a very small part of that much larger loan package to that company, and my guess is the company will be sold in the next six months, and we'll be out of that transaction with some amount of loss and some -- the way they're structuring it right now, and they're working on it, some part of up side in the company as time goes on. We'll just have to see how that all shakes out.

This leads me to say that the program we set up when we founded the company with regard to buyouts is working as we planned in terms of quality, because the quality of our buyout portfolio is really good, but in quantity, of course, we're behind our original goal. It's just difficult to find really good buyouts at the prices we're willing to pay. So we've been very slow. We've been very cautious in our selection of companies to buy, and in particular we've been unwilling to pay too much. On the syndicated loan side, that business, we didn't expect it would go through such a panic that it's gone through. Senior syndicated loan marketplace has just gone crazy, and our loans have depreciated anywhere from 10% to 15%, and with the turmoil caused by this panic, the debt marketplace, there just may be some opportunities for us on the buyout side, but we're not going to get into the senior syndicated loan marketplace any time soon. But we continue to review all the areas, and we'll certainly report to you every quarter on that.

Now turning to the financials, our balance sheet is strong at the end of March quarter we had 145 million borrowed on our line of credit. We had about 206 million in equity. So we're less than one to one leverage, and this is very conservative for finance companies like us. Our balance sheet for the company is very strong today. We believe this leads to a very low risk profile, and our line of credit is $200 million, and it was extended for another year this past October, so it will come up again in October 2008. And the income statement for the March quarter, net investment income before appreciation, depreciation, gains and losses was about $3.4 million versus $2.8 million for the quarter last year, an increase of about 21%.

For the fiscal year ending March, we had a net investment income of $13 million versus $11 million for last year, about a 17% increase. In this presentation, we are talking about weighted average fully diluted common shares when we use the per share numbers. That is the most conservative way of approaching it. For the quarter ending March 31st, 2008, net investment income is about $0.21 a share for the quarter as compared with $0.17 for the same quarter a year ago. And this was an increase of about 24% on a per share basis. This mirrors our slow and deliberate increase in assets. Nonetheless, I think we're doing the right thing. For the fiscal year ending March, net investment income per share was $0.79 versus last year of 0.67, about an 18% increase.

Now let's turn to unrealized and realized gains. This is a mixture of appreciation and depreciation on the unrealized side, then gains and losses on the realized side. We like to talk about these two categories because, one, that is the realized gains and losses, are real cash, and then the second, the net unrealized depreciation, meaning unrealized appreciation versus depreciation. This is noncash accounting. It comes from the value put on the portfolio. On the gains and losses, we had a loss for the quarter ending March. We had a net realized loss of about $2.2 million. That was due all from the sale of our senior syndicated loans, as mentioned on many of the past calls, we are selling some of our senior syndicated loans that have low rates. Even if that means taking a small loss because we want to free up money in order to put it into buyouts, which is our stated goal and objective. We invest this money at a higher interest rate once we've taken it out of the senior syndicated loans. It's actually accretive to our shareholders when we take it out because we're selling off a very low interest rate, taking a small loss, and then turning around and investing that money in hopefully a much higher rate.

Unrealized depreciation and for March quarter we had a very large depreciation of about $11.1 million over the entire portfolio. Again, most of that was coming from the depreciation on our senior syndicated loans. This is a noncash item. Comes from the value put on the portfolio that I talked about earlier and does not have an impact on our ability to pay dividends. The unrealized depreciation reported during the quarter ending is being pushed down by all these senior syndicated loans as they continue to have strong downward movement. They're paying as agreed, but the market for them is just not very solid these days.

Now turning to the last item, net increase in net assets from operation, this term is the combination of net investment income, appreciation, depreciation, gains, and losses, so it's a mixture of all of those. And for the March quarter, this number decreased about $9.9 million versus an increase of $457,000 last year this time, all due to depreciation mentioned in the press release, as well as the small loss that we had. This March quarter we're at a negative of about $0.60 per share versus last year a positive of about $0.03 per share. But investors should expect this kind of movement in the value of the portfolio for two reasons. One, we have the senior syndicated loans, and they have certainly bounced around in value, mostly going down. And then the way that we value our control and other investments that we have in our buyouts, those are based on earnings and go up and down as well.

Just turning to the -- one of the positive items, we didn't have any phantom income, or, as we call it, paid in kind, or original issue discount for the year ending March 31st, 2008. And as of March 31st, we don't have any loans that have any of this kind of phantom income. This is important because you have to record the income on the one hand and pay it out, but you don't have the cash to pay it out. So we've avoided that problem in our portfolio. Our portfolio of companies are paying on time as agreed except the one deal that I mentioned. We have one proprietary loan, it's tiny, that's also not paying as agreed. Our average loan rating for March quarter remains relatively unchanged. The risk rating system we use, we set it out in our 10-Ks and 10-Qs and our reports, was 6.3 this quarter versus 6.6 March 31st last year this time on our buyout loans. And the risk rating we use for unrated syndicated loans was 7.1 for the quarter versus 7.2 last year this time. Our risk rating system gives you a probability of default and the rating is from 0 to 10 with 0 representing high probability, or I guess that in case it would be in default. And the risk we see here staying relatively the same. So that risk rating hasn't changed.

As far as the syndicated loans that have a rating, the rating has -- is B plus or B 1 for this quarter and for the March quarter ending last year, so those haven't changed during the last year. We are quite satisfied with our current portfolio mix but it will be changing over time as we move out of the senior syndicated loans into 100% of buyouts that we have, and that will reduce the amount of senior syndicated loans, and we'll probably have to take a few more losses as we move out of that. Just to remind you how that works, let's assume for the sake of argument that you were selling a $1 million loan, and it was paying at 2.5 over LIBOR, which today would be, round numbers, around 5.5%. That means $1 million dollars is earning $55,000. If you sell it for $0.90 on the dollar you get $900,000. Assume you put it in a buyout where we're averaging over 10%, but let's just assume 10% as a flat number, then you'd be making $90,000. So it would be accretive to move money out of one category into another. The biggest problem for sues that we had hoped the marketplace for senior syndicated loans would come back. It hasn't, so we've been selling back loans and taking the losses and going forward. I think as time goes on, that marketplace will get better but we can't wait for it forever. We do have dry powder in the fact that we can borrow under our line of credit.

Marketplace for small company buyouts, it's a different world right now. There are many people that own small businesses with strong growth rates that are still going for top dollars. We've seen the competition for companies in that area. People are paying eight times cash flow, which is still quite striking in this marketplace, and many of the buyout funds that are doing this are putting in as much as 50% in equity. This is still high by our marker, and we're not finding financings in this area, and there may be some prices in the buyouts in the future that will change, but we're hopeful that this marketplace will come back. It's just -- it's given us some heartburn to try to find these higher priced deals and buy them at a price that's reasonable. On the other hand, there are lower growth rate companies which we do like because they have steady cash flow. We've been purchasing those for lower multiples at 4.5 and 5.5 times cash flow. We've been buying some of those. As we continue to buy them, our balance sheet will show that we've provided the debt and the equity for the purchase, and we do that because we he need to provide the debt to generate some income from those investments to pay out as dividends to shareholders. I think the rest of the year will be okay for us, and we'll continue to grow our asset base. I think the dividend should follow that trend.

We're concentrating on variable rate loans when we can, certainly in the syndicated loan marketplace. They are variable rates. We've been hurt somewhat by that because the variable rates have gone down. We don't have any way of stopping them from going down. We often have minimums in the variable rates that we use on our own buyouts but not in the syndicated loans. Those usually stop at 9 or 10%, but the syndicated loans do not have minimums, and since LIBOR has trended down, we've seen our income decrease somewhat but now that we're at the bottom, I don't see LIBOR going any lower. In fact, it's been trending up other the last couple of months, and I think we have $53 million now in fixed rate loans. Most of those are in our own buyout portfolio and not in the senior syndicated area. But that senior syndicated area, as we continue to see the market for LIBOR move up, should see the income come up as well.

In order to have some protection, we did purchase an interest rate cap on $60 million so that our fixed rate loans as we continue to add to it will have a cap on that so that we won't get hurt if all of a sudden inflation comes back ferociously and interest rates go up. So we are somewhat protected there. Our worries continue to be the cost of oil and gasoline. It's just having a tremendous rippling effect in our economy. It's taken money out of the middle class pocketbooks and I think that spending is going to be the biggest problem that we have to get over in terms of the economy. We've avoided investing in restaurants because we think they're going to have a difficult time as people don't have disposable income. We're really no longer worried about inflation, at least the way the government measures inflation. That seems to be pretty low right now, but I want to warn everybody, inflation will be back. The amount of money that's being spent on the war in Iraq and certainly we support our troops. They're the most wonderful people in this world, and we support the troops in Iraq, but the war is draining our economy, and all of the pork barrel spending by the federal, state, and local governments is out of control, and Congress in my own estimation is acting irresponsibly in spending so much money these days. And all of that excess taxing and excess spending is causing a great deal of dislocation and is going to eventually cause us to have a pretty serious inflation. If you combine that with the oil prices, you can see why the dollar in terms of the euro and in terms of most other currencies has been battered really bad. I think it's going to hurt us long term because inflation will come back.

Trade deficit with China continues to be a problem as China subsidizes its business to our detriment. We're now seeing, of course, the full impact of the housing industry downturn and the mortgage industry problems. Investors and lenders have just lost a lot of money, and there's nobody out there to pick up the slack, and I'm not sure when the home loans are going to come back in a substantial way, so the housing problem will go away. In other ways the U.S. economy continues to hum along. Small businesses have kept their costs low. Many of them have good profits that are improving, but we do see a slowdown in the marketplace. It's not great, but it looks like it's more flat than it is a downturn. And we do see a few companies coming to us that are not as strong as we had seen in the past. I'm not sure we've reached the stage of a recession, but we are certainly just flat for awhile.

The manufacturers are not operating at full capacity, and I don't think they're going to get to the in this business cycle. So everybody need not worry about hitting up against the inability to produce product because the capacity -- they're out of capacity. This is not going to be one of our problems. There's some slowdown in hiring. We see some of that. Backlogs have come down some. But at the end of the day, this looks like more of a slowdown and not a recession. We remember the recessions of 2001 and 1990 and even back in '81. These were tough times, and while we're in tough times today, it's not the same as those recessions that we remember back then.

As you all know, we do have a shelf offering that's registered. We could sell more shares to finance our future growth but we don't need to do that now. We just had a rights offering, and that brought in a little over $40 million in the rights offering, and that, combined with our line of credit, has made it so that we'll be in good shape and we can sell off some of our senior syndicated loans. I think we don't have to raise any money for the foreseeable future. We would like to have the option of raising money by selling shares at below net asset value. This last rights offering we did was just a killer for us. It went out at such a low price. Instead of doing rights offering, whenever we have to do that say it's next winter, instead, we're going to be asking shareholders to let us sell stock at below net asset value. And I hope you'll vote in favor of that. I believe if we had that option last time and done that in place of our rights offering I think we would have prevented the level of dilution that we've had in that rights offering. Because we would have had some control over the ultimate price and when things were sold. When you do a rights offering you set yourself out there for 30 to 60 days, and all the shorts can come in and just wreak havoc with the stock. So I need your support and I hope each of you will vote in favor of each of us being able to do that when we put our proxy out.

Our distribution declared by the board of directors in April was $0.08 a month at a run rate of $0.96 a year. Distribution would say based on stock price yesterday's close was very low at $9.04. That would give you a yield of about 10.6%. So it's a very heavy yield. You can keep up with us better if you go to our website and sign up for notification. We don't send out any junk mail. So go to www.GladstoneInvestment.com and sign up and you will be able to get the e-mails as they come out as we post them to the website.

Just looking out as far as we can see, I think the year ending 2009 is going to be a good year for us. That ends next March 31st. We really can only see a couple of quarters out, and right now it seems like everything is going along just fine. It's flat, not down. We are stewards of your money, and we want to take care of it, so we'll stay the course, continue to be conservative in our investment approach and hopefully things will work out for the best over the next year. I'll open it up now for questions. So is Ryan, if you will come back on and read the instructions, please.

Thank you. Ladies and gentlemen, at this time we'll be conducting the question-and-answer session. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Vernon Plack with BB&T Capital Markets.

Thanks very much. David, I had a question. Wanted to make sure I understood you correctly. Can we expect all buyout growth in the future to be funded by the sale of syndicated loans assuming that we don't see a dramatic change in price at this point? I just noticed in the just completed quarter, I think you sold about 16.5 million in syndicated loans, and you purchased, I think, just under $11 million in buyout investments. Am I thinking this correctly?

I think you are in one regard. As you know, we took the $40 million that we had from the rights offering and paid down our line of credit. So I think we're about $100 million in line of credit that we've used, and we have another $100 million. So, Vernon, we are going to use obviously that first. We'll use some of it first. You always keep some of your line of credit. So you should expect us to take anywhere from 70, $75 million of that and put it into buyouts. We've been trying to time our sale of our senior syndicated loans with when we think the marketplace will accept it. As I've mentioned on the call before, we've had some difficulty in selling these because there are not a lot of buyers. In some cases, I would say maybe half of what we have on the books today, there just is no market for it. That is, the marketplace is shut down. And so we don't have the opportunity to sell them. I think that will free up over the next six months, and people are starting to buy more and more. As you have probably noticed, some of the new senior syndicated loans have come to market as well. I would say that we've got room for $75 million from the line of credit, and probably another 75 or so from our sale of senior syndicated loans. So hopefully we can put another $150 million in buyouts before we need to come back to the marketplace. And with any luck, the senior syndicated loans will have come back some and we can even sell the ones that are not marketable today.

Right. So it will probably be some type of mix then.

That's right.

Okay. And as far as asset quality goes, I realize this is highly subjective, but would like your thoughts. In terms of where you see asset quality -- or when you see asset quality bottoming this time around in this cycle. How close do you think we are to a bottom where asset quality actually starts improving?

I think for the senior syndicated loans we're at the bottom, and that would be my guess today, because I think all -- that marketplace is reasonably efficient in terms of people watching it. That is, people looking at that marketplace and deciding when to get in. We're seeing some firming of the numbers, the indexes that we watch. Now, we also saw that firming back in December, and, of course, the quarter ending January, February, and March, that quarter was miserable in terms of the down trend. So you could have another down trend like that, but right now it seems to be stable, it seems to be working, and new deals are getting done, and hopefully we've reached some kind of plateau. As far as the buyout is concerned, our problem has been twofold there. First of all, there's still a lot of equity money out there looking for buyouts, and they're willing to put substantial amount of equity in, in order to get a deal done. So that's been good for Gladstone -- better for Gladstone Capital than it is for Gladstone Investment. But Gladstone Investment also has watched owners of businesses just sit on the sideline with a very high price for their business because somebody else got a high price, and they don't want to take a lesser amount.

It's sort of like what's going on in the housing marketplace where someone down the street from you sold their house for $0.5 million, and you're trying to get a $0.5 million for yours, but the marketplace has changed, and you're only going to get 400. Well, you sit around a long time with a $500,000 price tag on your house hoping someone will come along and buy it, at some point in time you finally give up and you price your house at $400,000. What we're watching many of the owners of sciences go through that same calculus as they hope the marketplace will come back and they hope somebody will pay their price, and after awhile they give up and go away. The big opportunity for all of us in the buyout business, especially the smaller end that we're in, is that so many of the baby boomers owned businesses and are now going to sell those businesses because they're reaching retirement age. And there's going to be a huge number. On average there's about 200,000 businesses sold every year. My guess is that will creep up by very large amounts over the next five years.

Okay. I guess my question was more focused on the asset quality of the equation, and just your general thoughts in terms of looking at the market, and when do you think that we'll actually start to see delinquencies decrease rather than increase? Because I think most people expect the number of non accruals to continue to go up for awhile.

I'm not so sure of that. Obviously I can be wrong, but if this is the plateau, and we are going to plateau here and go forward, it would mean that we're not going to see more delinquencies than we're seeing today. And that's my belief. I don't think this is going to be a deep, long recession. I think this is going to be a deep, long recession for housing and perhaps with the auto business, but I think the rest of us will escape the difficulties that we saw back in 1990 and 2001.

Thank you very much.

Next question, please.

Our next question comes from the line of Ross Haberman with Haberman Funds.

David, how are you? Quick question. Did you mention how much of the portfolio was in the equity part of the capital structure and what you were -- I guess what your cost is versus what you were carrying it at?

I have to dig that number out. What is our amount in equity versus debt is what he's asking. We always look at the debt and equity together as a bundled security. At the end of the day that bundled security is carried at about a 10 or so. You're saying 14 million? I'm sorry. What's the cost? So total equity is -- good grief, that's small type -- $38 million, and the value is 39? I can't read that -- I'm sorry, $50 million for the equity.

No, I ask that question because that seems to be the most volatile portion of the portfolio. Would that be a fair assessment?

Yes, that is. If you took that volatility out, and you took the volatility that we had in the quarter from the senior syndicated loans, which are also a lot, you would have eliminated most of the volatility in the portfolio.

Do I understand that on average you're carrying the syndicated loans of roughly $0.85 to $0.90 on the dollar?

That is correct. Some a little bit lower and some a little bit higher, but that's the average.

And just one technical tax question. Is any of the dividend income considered a return of capital?

Yes. How much is that? Do we know that? We didn't earn our dividend this last year. We'll get that for you.

You can come back to me. Thank you.

Okay.

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets.

Hey, Jon.

Couple questions here. You talked about the shift in -- to higher equity contributions from sponsors and buyout, and I'm curious if the sellers have changed their expectations at all or if they have any preference for the consideration mix, or is that really a nonissue?

I don't think the seller really cares. They're getting their cash, and usually cashing out. Some of them will have a carried interest going forward. They will have some -- I can't say that that would be a material item in anybody's discussion point when they're selling their company, but the main thing they want to know is all the money is there, and when we are stepping up to buy something, we tell them that we will close, we'll provide all of the right-hand side of the balance sheet if necessary to close it, and then once it's closed, and if we have the senior debt, we go out and are talking with banks about taking out that senior debt. The seller usually wants to know from the LBO fund if they have the senior debt and the junior debt lined up, and rarely take their word for them any more. There was a time, of course, when they would take their word, but I think today they're being much more cautious. It puts us in good light when we're competing with them, but I don't want to say that we have that much of a competitive advantage by offering a one-stop buyout.

And then in terms of the pipeline, or the deals that are crossing your desk, how would you characterize the fundamentals of those companies? Have they deteriorated at all, or are they stable?

Well, that's what we've been so surprised at, John. Usually in a recession when we're opening up the mailbag or talking to somebody, the companies that are coming in have a problem. They've had a couple of good years maybe three good years, but this is their off year the last 12 months, and they're showing lots of problems, no backlog in their discussions with us, and needing to meet payroll, a lot of urgency. I'm just not seeing those today. And that's what gives me some degree of strength in my projections about this not being a very bad recession. In 2001 and certainly in 1990, people would show up just desperate for money, and you'd see even things like a car dealership in which they were out of trust with their floor plan, and the floor plan, they had sold the car but not paid the bank because they needed the money to keep their operations going, so they were in trouble with their bank because they didn't have enough collateral, and they were looking for money from us in order to solve that problem.

John, we're just not seeing that today. And maybe I'm -- maybe we're somehow insulated from it, but I doubt it. And that's what's given us the reason to believe that the small business world that we deal with is not in that big a trouble. What we did misjudge -- or I shouldn't say we. What I misjudged was the lack of liquidity that came to the marketplace from the fallout of the subprime and all the mortgage mess that's out there today. That really threw me for a loop. I just didn't expect it to have that big a impact. Obviously I was missing something all together.

And you're seeing the same fundamental performance characteristics in your controlled companies?

Yes, we see -- obviously some of them are flat, but some of them are doing exceedingly well and just continuing to knock the ball out of the ballpark. It's wonderful to watch these guys and gals do their job every day.

And then one last question that's more technical in nature. But on your valuation technique, for the companies that have lower levels of cash flow, how does that fit with 157? Because I'm assuming will you be adopting in that the coming quarter. How does that fit with 157? And even though I understand the consistency of the methodology is there any desire to change that methodology at some point in terms of how you value some of those companies?

Well, we would not like to change the valuation. This is the valuation technique known as total enterprise value, and you end up valuing the total enterprise, then determining what the securities you own are worth based on the debt, then the subdebt, then the preferred, and then the common, in terms of which ones get valued at -- or de-valued. And from our perspective, it's the right thing to do because we buy these bundle of securities all together. We don't buy one separate, then sell one separate. So for us, the total enterprise value is the right technique, and one of the problems with the technique has been that some folks have used it in situations where they don't control the company. That is they're just making a loan to the company, then they use total enterprise value. We're not doing that, so as a result, I think we're okay using total enterprise. It is a debate within the industry as to whether total enterprise value is a valid technique. I think the SEC is planning to weigh in on that. I don't know if they will or not. We've heard stories about that.

I can tell you that the accounting firms, when we looked at the quarter ending March 31st for those that adopted 157, lots of continues development companies maintain total enterprise value in their valuation techniques, so it seems to be accepted among the large accounting firms that are auditing these companies, and we will adopt and we really have been following 157 all along, but we'll formally adopt it for this company on the quarter ending June, and I see no reason to change total enterprise value, because it is -- it's apropos of what we do. That is, the market and 157 always points you to the market that you're in. The market is not buying and selling loans. The market is buying and selling companies. And the way that we market the securities are in bundles, and in addition to that, the market may be a refinancing completely the company and paying us out. So from our perspective, total enterprise value is the appropriate way of valuing the company, and we would hate to see either the accounting firm or the SEC come in and say that you couldn't use it. But we'll obviously follow whatever is going on in the industry, and right now that seems to be appropriate. I'm not sure I answered your question, John.

No, you did. That's very helpful. I appreciate it.

Other questions?

Our next question comes from the line of Ross Demerel with Hilliard Lyons.

Good morning.

Good morning, Ross.

I was looking at the sale of loans subsequent to quarter end, and you indicated that you've incurred a loss. I'm wondering if you could maybe go into the valuation differentiation between March 31st and a sale of those loans at a loss. Did the market deteriorate more, or maybe there was just one loan that was misvalued?

There's no -- I hope I didn't mislead you. There is no misvaluation. What happens when you have a loss is that you actually write the loan back up to its par value, and then it's sold, and the loss runs through. So you get an appreciation, if you valued the loan down, let's just use an example. If you had a million dollar loan, and you valued it at $900,000, and then you sold it at $900,000, for that quarter you will have that depreciation come back through your P&L as appreciation, so you get $100,000 in up tick on appreciation, then you'll take the loss of $100,000 in your gains and loss statement. So there's not a mispricing. That is, if you're believing that we valued it at $900,000 and then sold it at 800,000, that's not what's happening. We valued these I think appropriately and most of that appreciation has run back through the P&L.

So we'll see some of that appreciation for the current quarter, I guess.

You do.

On the loss that was taken.

That's exactly right. And I don't know exactly where they were valued, but they were valued at some kind of market. We got a quote from somebody out there, or S & P, Standard & Poor's gave us a value for it, that they thought it was worth. So we had an independent valuation technique for those senior syndicated loans, and I have to go back and look at each one of them to give you an exact number but I think what I just explained is what happened.

Thanks.

And to that question, from Ross Haberman, it was about $2.2 million in return of capital or about $0.15 a share. So a lot more than we want but that's the number. And next question, please.

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No questions?

There are no further questions. Any concluding remarks?

No, just thank you all for coming to the conference call, and we'll see you again next quarter, and I think we'll have hopefully much better news. That's the end of this conference call.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference.