Gladstone Investment Corp (GAIN) 2008 Q3 法說會逐字稿

Greetings, and welcome to the Gladstone Investments third-quarter 2009 conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Gladstone, Chairman for Gladstone Investments. Thank you. Mr. Gladstone, you may begin.

Thank you, Claudia, for that nice introduction, and good morning to you all out there. This is David Gladstone, Chairman, and this is the quarterly conference call for shareholders and analysts of Gladstone Investments, trading symbol GAIN or gain.

Thank you all for calling in. We're so happy to be able to talk to shareholders. I would like to see you come by the office sometime if you are in the Washington, D.C. area. We are in MacLean, Virginia, a suburban Washington, so please stop by and say hello. You'll see a great team working for you. I think they are the best in the business.

Now, let me read the statement about forward-looking statements. This conference 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 the future performance of the Company. These forward-looking statements inherently involve certain risks and uncertainties even though they are based on our current plans and we believe those plans to be reasonable. There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including those factors listed under the captain, "Risk Factors" in our periodic filings as filed with the Securities and Exchange Commission. And those can be found on our website at www.GladstoneInvestment.com, and they can also be found 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.

As some of you know, we have a new tradition at the Company regarding calls to shareholders. In the past, I did all the talking, but we have a lot of talented people here at the Company, so we have invited some of them to talk to you today as well. And I know shareholders would like to hear from some of our talented team and while I'm not going anywhere and neither is Chip Stelljes or Terry Brubaker, we just want you to hear from some of the other top people as a part of the team.

First you'll hear from Dave Dullum, our President. He will cover a lot of ground, including a view of the future. Dave, why don't you start now?

Thanks, David, and good morning, everyone. At GAIN, as you know, we invest principally in buyout transactions, where we buy small businesses with their management teams and the private equity sponsors. Our products for this market are primarily mezzanine or subordinated debt investments combined with an equity coinvestment feature. We accommodate and facilitate the private equity sponsors in their ability to achieve the necessary leverage for a transaction. The recent environment, the one we are currently in, for typical asset-based and bank senior term loans has led to decrease in this total leverage, which, in turn, has increased the demand for our products.

Through mid calendar '08, we had also built an investment portfolio in senior syndicated loans of large and middle market buyouts. This was never intended to be a continuing aspect of our investing strategy. And, as mentioned in previous calls, we no longer make these investments. In fact, we use our existing portfolio of loans from time to time as a source of capital for our principal buyout investing activity. This portfolio has also been affected by the lack of liquidity in the financial markets, so we are being very prudent in liquidating these loans to minimize those losses. Since the end of the year, we are seeing areas of some improvement in these prices and we expect this to continue into the new year.

To the buyout portfolio, for the nine months ending December 31, 2008, we invested in three new buyouts for a total of approximately $37.9 million and we made one add-on investment of $3.8 million to one of our portfolio companies in order to facilitate an acquisition. The new investments include the buyout of CCE, a large independent golf cart distributor, which was made in the quarter ending December. This investment was for $10.7 million with $7 million in mezzanine and $3.7 million in equity. This structure reflects the strategy of our investment mix going forward.

We had no exits, although in the quarter ended September, we did recapitalize one of our buyout deals, Quench, in which a private equity firm made a significant growth equity investment and we received a debt repayment of approximately $7 million. As a result, we now own a 4.5% equity ownership stake and have classified this as an affiliate investment.

It is still too early to exits and realized gains from all buyout type investments in our portfolio. We will continue to evaluate the portfolio and try to plan ahead so when the financial markets do improve, we will be in a position to exit investments as appropriate. We hope more opportunities materialize in the near future.

Regarding buyouts after the quarter end, we made no new investments nor exited from any buyouts after the end of the December quarter.

For syndicated loans, during the quarter, we invested in no new syndicated loans. During the quarter, we received repayments from the sales or settlements of syndicated loans of about $0.9 million, including normal amortization. We neither sold nor settled on any syndicated loans for the quarter, thus, no loss was realized.

As we have mentioned previously, we are selling our syndicated loans, when prudent, as a means to fund our principal investing activity and to pay down our line of credit. We will evaluate a potential realized loss on each sale in relation to the new proprietary investment being made, as this has implications to our cost of funds and the returns to the portfolio. After the quarter end, we made no new syndicated loans and no new sales.

Status of the portfolio. At the end of the December quarter, we had at cost, $227 million invested in buyouts and $127 million invested in syndicated loans for a total portfolio cost of $354 million. At the end of the December quarter, our investment portfolio was valued at about $325 million with a cost, as previously mentioned, of $354 million for an unrealized appreciation of around $29 million. Our portfolio, therefore, is now valued at about 92% of cost. And for reference, at the end of September, it was valued at about 94% of cost.

A significant amount of that unrealized depreciation occurred in the June and December quarters. For the quarter ending December 31, '08, the overall portfolio depreciated about $7.5 million from the previous quarter, which is approximately 26% of the cumulative unrealized loss.

Valuations affect this, and, turning to valuations, I wish to call your attention to an important aspect of the methodology we are using for the equity portion of our investments where we have a large ownership position. The valuation methodology we adopted for those investments determined that enterprise value, which is based on a multiple of an audited earnings or EBITDA or cash flow of the portfolio company. We believe this provides an indication of the aggregate value, including the funded debt, that the business could be sold for at that time.

When a company has good cash flows, the enterprise value of that portfolio company will go up, and if that portfolio company has poor cash flows or no earnings, the enterprise value will go down. This is the way the stock market and the investment community generally values a business. Therefore, if a company has very low cash flows or a loss, then this method will result in an equity value that is very low or possibly zero, even though its financing is adequate and the business fundamentals are solid.

So, we believe this equity valuation method is very conservative when companies have poor or no earnings at the time of valuation. As a result, this method will produce volatility in the value of the portfolio.

Turning to our record, since our inception in July 2005, we have completed 13 buyout investments for a total of approximately $227 million at cost at quarter end with no capital gain exits from that portfolio. And since July 2005, we've purchased 72 loans in the syndicated senior market for a total of approximately $308 million. Many of these have been paid off or been sold so that the current balance is $127 million at cost. Over time, we will exit all of our syndicated loans with the proceeds directed toward buyouts and paying off our line of credit.

I should mention that a few of our buyouts are underperforming but we do not think they will produce losses. On the other hand, our other buyouts are weathering the current environment and performing well considering the circumstances. We continue to monitor our portfolio closely and proactively provide assistance as necessary.

Loan ratings. Our average loan ratings for the quarter remain relatively unchanged. The risk rating system we use set our originated loans and an average of 5.4 for this quarter end, which is unchanged from the September 30 quarter. The risk for unrated syndicated loans was an average of 7.9 for this quarter versus an average of 8.2 for the September 30 quarter, a small but expected decrease.

Our risk rating system gives you a probability of default rating for the portfolio on a scale of zero to 10 with a zero representing a high probability of default. We see the risk in this portion of the portfolio staying relatively the same as prior quarters.

As for our rated syndicated loans, they had an average rating of BB2 in the current quarter, down from B+B1 for the September 30 quarter end.

However, we are quite satisfied with our current portfolio mix, and as previously mentioned, we are moving toward focusing exclusively on buyouts and will ultimately exit all syndicated loans in our portfolio.

As far as rates, fixed versus variable, we have concentrated on variable-rate loans in the syndicated market so that we are not adversely impacted if rates increase and our cost of borrowing increases as a result. However, rates have come down significantly, so we have seen our income drop on these senior syndicated loans. On some of our buyout loans, we have variable rates, but we almost always have a minimum or a floor in the rate we charge so that if interest rates decline, it will not hurt our ability to make our distributions.

We have $59.9 million of cost and fixed-rate loans all in the buyout deals. They are at relatively high rates, so we should be okay there. Previously, in order to have some protection on our cost of funding if interest rates rose, we purchased interest rate caps on about $60 million of our debt. Some of these have expired. We have not purchased additional caps and we now, therefore, have caps on about $40 million of our debt.

Let's see a pipeline for deals. Our pipeline of investment opportunities, which includes mezzanine with equity coinvestment and other junior capital instruments is relatively strong. However, we continue to worry about the economy and we will be diligent in our pursuit of new opportunities and make sure that they are worth the investment risk and meet our standards.

To the marketplace. First, on the syndicated loan side, since our call to shareholders last quarter, the syndicated loan marketplace for large and middle market companies became quite illiquid, although since the beginning of the new year, we are seeing some improvement in indicative prices quoted by the loan arrangers for the stronger companies. As a result, the value of many of the loans in that market had declined through the end of the December quarter and, of course, our portfolio of syndicated loans has generally tracked this market.

Due to the illiquidity in this market, and as we historically use third-party broker indicative bid pricing in determining fair value, we concluded that these bid prices were not determinative of the fair value of the portfolio. Therefore, we had to find a more representative way to determine the value for these loans. The result was adding to our valuation method for our syndicated loans in our portfolio a provision to value the loans using a discounted cash flow method. You will hear more on this later. The fair value of our syndicated loan portfolio decreased by about 7.5% from last quarter, which includes normal amortization.

Turning to the marketplace for smaller companies and our buyouts. For the buyout market, which, of course, is where we focus, the environment is different. The major impact on this market is continuing deterioration of the senior loan market. As senior lenders continue to drop out of the market, it has become harder for the buyout funds to raise the necessary capital for individual deals. The result is, one, valuations' relative EBITDA has declined. Two, the private equity firms are having to invest a higher proportion of equity relative to the debt. Generally we are seeing it up to around 50% from about 30% earlier last year. And thirdly, the opportunity for mezzanine and equity coinvestment has grown, being the tranche of investment, which, of course, now fills the gap between the senior lenders and the equity investors. These factors are to our advantage.

In the shareholders call for the quarter ended September, we had mentioned seeing some of these signs and we had begun to position our products accordingly. We will continue to concentrate on this area and build our pipeline. However, the current economic climate has placed a premium on investing patience and in the due diligence phase, greater emphasis on business analysis since the visibility for revenues and product demand in the companies we look at is quite uncertain. This will limit our new investment activity.

However, as we continue to participate in these buyouts, our balance sheet will reflect the mix of debt and equity coinvestment that we have made in these acquisitions. This mix allows us to generate income from the debt investments to provide cash flow for distributions, while we build the equity portion for future capital gains. I believe the rest of the year will be okay for us as we manage our asset base and patiently make new investments, taking into consideration our capital constraints. Our outlook and goal for this fund continues to be the maintenance and consistency of our distributions to shareholders while achieving solid growth in the portfolio under proprietary investments in the small business buyout markets. And Dave, back to you.

Thank you. That was a great report. Very nice in detail. We are excited to have you working on this side of the business for us and we expect this fund to do better during the calendar year. Now let's hear from our CFO, Mark Perrigo, on fund's financial performance. Mark, take it away.

Thank you, Dave, and good morning. Let's begin with our balance sheet. Our balance sheet continues to remain strong. At the end of the December quarter, we had approximately $343 million in assets, consisting of $325 million in investments at fair value, $19 million in cash and other assets. We had about $118 million borrowed on the line of credit and had about $224 million in net assets. So we are less than one to one leverage. This is a very conservative balance sheet for a company like ours and we believe our overall risk profile, as well.

During the quarter, we did amend our credit facility to extend the maturity date to April of 2009 and reduced the borrowing capacity on this facility to $125 million.

Moving to the income statement, for the December quarter end, total investment income was approximately $7 million versus $7.5 million in the prior-year quarter while total expenses, including credits, were approximately $3.4 million versus $3.8 million in the prior-year quarter, leaving net investment income, which is before appreciation, depreciation, gains or losses of approximately $3.6 million versus $3.7 million for the quarter last year, a decrease of about 3%.

For the nine months ending December 31st, total investment income was approximately $19.9 million versus $21 million for the same period last year, while total expenses, including credits, were approximately $9.4 million versus $11.4 million in the prior year, leaving net investment income of approximately $10.4 million versus $9.6 million for the nine months last year, an increase of about 8.3%.

Okay. Now let's turn to realized and unrealized gains and losses. This is a mixture of appreciation, depreciation, actual gains and losses on our investments. Said another way, net realized gains and losses meaning actual gains and losses are from cash sales or disposal of assets, meaning investments.

Net unrealized depreciation, meaning net unrealized appreciation versus depreciation, is recognized in our statement of operations of non-cash accounting from the change in fair value on a portfolio during the quarter.

For the quarter ended December, we had no realized gains or losses as we did not make any investment sales. As has been mentioned on many of the past calls, we are continuing to forecast the selling off of some of our syndicated loans that have low rates even if that means we have to take a loss. We are then able to invest the proceeds from the sale on higher interest-bearing loans or use those proceeds to pay down our line of credit.

Regarding unrealized depreciation, for the December quarter end, we had net unrealized depreciation of approximately $7.5 million over the entire portfolio. This is non-cash and comes from the value placed on the portfolio.

Although our aggregate investment portfolio has depreciated, our entire portfolio is fair valued at 92% of cost at December 31, 2008. The unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders, but does indicate that the value is lower and there may be future realized losses that could ultimately reduce our distributions.

As explained in our 10-Q filing of yesterday, we made a change in our valuation procedures to value our senior syndicated loans using the discounted cash flow method versus relying on third-party indicative bids. Given the continued economic downturn during the quarter ended December 31, the market for syndicated loans became increasingly illiquid with limited or no transactions for those [sub queries] for which we hold.

Recent accounting guidance was issued September 2008, specifically FSP 157-3, which provides guidance on determining the fair value of an asset when the market for that asset is not active. The guidance noted that in the current economic arena, there may be indications of an illiquid market that may include a significant decline in the volume and level of trading activity in that asset, pricing quotes that vary significantly over time or that prices are just not current. The marketplace for which we historically obtain indicative bids for purposes of determining fair value for our syndicated loan investments show these attributes of illiquidity. Historically, our valuation procedures specified the use of third-party indicative bid quotes for evaluating syndicated loans, where there is a liquid public market for these loans and market pricing quotes are readily available. When there was an active market, use of these agent debt nonbinding indicative bid quotes was deemed to be appropriate and acceptable in accordance with FAS 157.

However, due to the market illiquidity and the lack of transactions during the quarter ended December 31, 2008, we determined that current nonbinding indicative bids for our syndicated loans were not based on transactions within an active or liquid market and could not be relied upon and alternative procedures would need to be performed until liquidity returns to the market. As such, we have value our syndicated loans using the discounted cash flow method for the quarter ended December 31, 2008.

Now let's turn to net increase or decrease in net assets from operations. This term is a combination of net investment income, unrealized debt appreciation or depreciation and realized gains and losses. Please note that we are talking about weighted average fully diluted common shares when we use per-share numbers. This is the most conservative way of stating earnings per share.

For the December quarter end, this number was a decrease of about $3.9 million or negative $0.18 per share versus an increase of about $5.1 million or $0.31 per share in the prior-year December quarter. This change is primarily due to a greater amount of unrealized depreciation from our noncontrol and affiliate investments and a dilution of common shares from the rights offering earlier in the year.

While we believe our overall investment portfolio is stable and continues to meet expectations, with the continued investor uncertainty in the current economy and credit markets, investors should continue to expect this type of volatility in the aggregate value of our portfolio.

As of December 31, 2008, we do not have any loans with paid in-kind income or original issue discounts. We have termed this kind of income phantom income because the company does not receive cash so we would rather have to pay out this phantom income as a dividend. We avoid such phantom income. Our portfolio of companies are paying on time and as agreed with the exception of one proprietary loan and one syndicated loan.

And finally, let me say that due to the issuance of new shares during this fiscal year which caused some dilution, we have a net asset value that's about $10.15 per share at December 31st. This is the lowest it has ever been, but is also related to the depreciation of the syndicated loan portfolio. This concludes by presentation. David?

Thank you, Mark. That was a great report and a good full summary of our financials. I hope (technical difficulty)

(Operator Instructions). Mr. Gladstone, you may continue.

Thank you very much. That's very embarrassing on our part. We don't know what happened, but some reason the phone went dead.

Again, Mark, thank you for that good report and summary of our financials. I hope each of our listeners will read our press releases and also obtain a copy of our quarterly reports called a 10-Q, which was filed with the SEC and can be accessed on our website, www.GladstoneInvestment.com. And it's also on the SEC website.

As Mark discussed, we had to change our valuation technique because the market for senior syndicated loans was judged to be inactive. The inactive bids that we were getting from the loan arrangers were less based on actual market activity and more, it looked like to me, more like guesses than actual bids. And the volume on the sales of the new issues had almost dried up and for many of the others, they had just stopped except for a few fire sale.

And let me just add as a footnote, the senior syndicated loans that we invest in are the smaller transactions with maybe four to 10 institutions holding those pieces of the loan. So these smaller ones don't trade at all and are very inactive in this marketplace. They are not nearly as active as you'd find in some of the big ones in which Morris purchased Wrigley's and that was a huge transaction and those tend to get some kind of activity in the marketplace. But we're not in those large ones. We've been doing the smaller ones. And the inactive bids that we get for our syndicated loans are based on prices that come from a market that everyone that looked at it from our perspective came up to say it was inactive. And some of the sales can only be described as fire sales rather than orderly sales.

These orderly sales that is prescribed by the accounting rules and the information released by the SEC regarding fair value are the way that you're supposed to do it. And with the enactment and the instructions in rule 157-3, as Mark mentioned, by the accounting profession, we have the ability to look at and value loans using discounted cash flow and coming to an orderly sale value. And this release is, I hope, just the first step in what will be a full review of the directives to use prices of inactive marketplace as a basis for fair value. We really need a lot of relief in this area.

Our biggest worry today is the debt marketplace, not only for our funds, but for the portfolio of companies we finance. We are worried about the bank's ability to provide our line of credit and for banks to provide lines of credit to our portfolio of companies. We are working to bring in some additional lenders to help with our line of credit, which comes due in April, and we have had some indications from our current lenders that they will lend. It will be more expensive, obviously, and we will have probably some tighter terms. But it's really too early to discuss what we're discussing with them, but we will have more information out on this topic as we negotiate the terms of our new line of credit for the April time period.

We are also very much worried about our portfolio of companies. We can't find low-cost bank debt and we think this will have some impact on the future growth of these companies because they lack the funding that they need to grow. And while some of the banks are making short-term loans based on the assets of the business, the banks are not doing long-term loans. And the good news is, though, that the regional banks, many of these regional banks, are making short-term loans, revolving lines of credit, and they weren't active last quarter, so things seem to be turning -- we've seen the first turn in the marketplace today. I think this is the first big sign that we have seen that the marketplace is changing for the better.

We do spend a lot of time working with our portfolio of companies to help them get bank loans. And if needed, we will put in money on a short-term basis to help them through this very difficult and rough time. Nonetheless, it is a difficult time out there. We continue to worry about the cost of oil, not where it is today, but we're very glad to see it fall and price and should have a favorable impact on the economy. However, it will surely go back up. Since the consumption of oil is tied directly to consumers and industrial use, we just feel that the price will go back up the way it did last time.

We are no longer worried about the inflation numbers. The way government measures inflation, we're not likely to see much inflation until sometime into 2010. And we think it will, very strong. I think you'll see a lot of changes in the prices of all kind of commodities by the time we get to 2010.

The amount of money being spent in the war of Iraq continues to hurt us, obviously. We think the soldiers are wonderful. They lay down their life every day for us this. We support our troops in Iraq, but we can't avoid the war drain on our economy today.

But even worse is the huge spending that is going on by federal, state and local governments. I think many of them are acting irresponsible in their use of our money. The prior year's government spending was about 44% of all spending in the United States and that means we are only about 6 points away from officially qualifying as a socialist country. I think they tally up the bailout spending and the stimulus bill and we'll easily exceed 50% in government expenditures in 2009.

These stimulus bills, by the way, are just another form of pretty radical socialism that is going on. The government is taxing the middle and upper-income workers and sending checks to the lower income workers. This is the purest form of socialism and these government bailout of industries that should have died years ago, again, they should have died years ago because of their inefficiencies, but they're being propped up by the government. This is government taking your tax dollars and the earnings of all of us in the future and our children and giving it to these poorly run businesses that really should have been shut down years ago.

Of all the money being spent, very little is aimed at small businesses. And this is one of the biggest mistakes that is going on in the stimulus bill now. Small businesses create 80% of all the new jobs and this new spending is missing the opportunity to stimulate the small business arena. The stimulus bill will not create long-term employment. It's going to be a short-term fix, and until we create long-term jobs by helping the small businesses, I don't think we will get away from all of the problems that we are in today.

The trade deficit with China continues to be just terrible. China continues to subsidize their industries to the disadvantage of our businesses. I don't know that this Congress will ever address that issue. In other ways, the US economy continues to remain in good shape. As long as businesses are not related to housing or autos or financial institutions, the businesses are avoiding the traumas endured by those industries. And many small business owners and other savvy people have kept their cost very low. And for many businesses, profits are still relatively good.

But we all know there's a slowdown. We see it in a few of the companies that we are in. We're seeing it in people and businesses that approach us for financing, so there is a dramatic slowdown since last summer, and it continues to sort of ride through the economy.

Employment, obviously, is much lower than we had forecast or many people had forecast. And those affected industry and finance and autos and housing layoffs have been widespread. And now it's spread to those industries that are related to those as well as to the retail organizations because people lack the money to buy goods and services.

The backlog on orders is coming down in many of our businesses. But others have still very good backlogs. We are quite surprised at some of the strength in some of our businesses. But for businesses outside the auto, housing and finance area, this, to me, looks like a normal recession. But for those, obviously, in the affected industries, the recession is very deep, very difficult, and is going to be life changing for many thousands of people.

We've been lucky that we've stayed away from the auto manufacturing area, the housing and the finance companies. We have some investments that touch on these areas and they will be affected by the disaster, but we've missed the big disasters in this recession that we are in.

I do think that we are near the bottom of this recession. And while it may take six months for things to turn around, I think this is an excellent time for people to buy good stocks and I certainly think our Company will do fine in the future and there's a good opportunity to stock up on it.

Our distributions declared by our Board of Directors in January is $0.08 per month per share for January, February, March. This is a run rate of about $0.96 per year. Some of that distribution is going to be a return of capital that we thought would be made up during the year, but with rates falling so drastically and so many of our syndicated loans with no floors, we have miscalculated the projections of income and we are going to have some return of capital. At this distribution rate and with the stock price at about $5.57 yesterday, the yield is extremely high. We have no plans to reduce the distribution. This means the buyers of the stock today are getting a fabulous return. We are looking at the new release from the IRS that says that some portion of distributions can be in stock. I have no idea where we're going to come out on that one. We have just started to take a look at it, so stay tuned. And we will let you know if we decide to change any of that.

Please go to the web site and sign up for our e-mail notification service. We don't send out any junk mail, just news about your company. You can go to www.GladstoneInvestment.com and sign up.

In summary, as far as we can see in calendar 2009, is certainly looks much better than 2008. We can only see for a couple of quarters out and we see things getting a lot better. We are stewards of your money, though, and as long as this economy stays as rough as it is, we're going to stay the course and be very conservative in our investment approach and not do any deals if that's what it takes.

And now let's have some questions from analysts and shareholders out there. So operator, if you'll come back on and lead the discussion, we would like to go forward.

(Operator Instructions). Jon Arfstrom, RBC Capital Markets.

A couple questions here. To the extent you can, David, can you talk a little bit about the debt level of the Company and where we are likely to see that go, and maybe give us a bit of an update in terms of how your conversations are going with the banks?

Yes, we've only had conversations with two of the lenders and we have a schedule in the next couple of weeks with a third. Both of them have voiced strong desire to be part of the credit. We think we will go forward on that basis, but we need to have a conversation with a third one.

We are talking about maintaining our level at about a 125, which is where we are today. And we also want to help those banks. We only have one bank that's been not interested in being part of the group. And they have been part of the group anyway. But our hope is that now that things seem to be leveling out a bit, that the banks will be more straightforward and want to lend money.

But, Jon, I don't know. We started very early. Obviously, we started at the end of January for our line of credit that comes up in April. So we certainly have plenty of time to work out all the kinks. And as I mentioned, a couple of the banks are very interested and very strong in their support of us. So we'll just have to see where it goes during the next 30 days. It will take us at least that much time to get everything in place.

And then in terms of the change in the valuation procedures, I certainly understand that, but it looks like there is one of your syndicated loans where you were able to use the quoted price on -- RPG Holdings. And I am just curious what the issue was with that particular credit. And then also wondering if some of the firmer activity in the market since year end has caused you to be maybe a bit more optimistic that you will go back to using quotes at some point?

RPG is the one that you are talking about, and that's because we have a settlement going on there in which we're going to get some cash and another note. And we pretty much know what all of that is. So it was easier to point to that than it was in the others.

RPG has gone through some difficult times and is being purchased by another company. So we pretty much know where we're going on that one, and that's the reason for that.

And the answer -- second part of your answer is yes, we intend to go back to market pricing as soon as the market comes back and I'm pretty optimistic. The marketplace for the senior syndicated loans did change somewhat in January. We are seeing some actual new issues come to market now. And it may be that in March, we can go back to that and my guess is certainly by June we will be back using market quotes.

But given the fact that we have some deals in which there are four of us in the transaction, four or five of us in the transaction, none of us are selling and none of us are buying, so there are no quotes. And as a result, the loan arrangers, who are the people -- and some of them actually own part of the loan pool as well -- they just make guesses as to what they think might go on if you dumped it into the marketplace today.

At this point, there is just no way to use the general guidelines that we would love to use, which is market price, because the market is just not there for us.

Okay, fair enough. Thanks, David.

Vernon Plack, BB&T Capital.

Thanks very much. David, I had a question about -- looking at your 10-Q, I know you estimate ordinary income versus return of capital given that you declare your dividends ahead of time. And I notice for the months of January, February and March, in terms of your estimate, it looks like the estimate for March is almost -- it's $0.088, almost $0.09 for the month, which is much higher than January and February and much higher than we have seen in recent history. And just curious in terms of why that is, why would ordinary income for that month be forecasted to be much higher than any month we have seen here for quite some time?

Yes, it's the quarterly payment of the syndicated loans. They normally don't pay monthly, so you get a bigger bump at the end of the quarter.

Okay, thank you.

At this time, we have no further questions.

Well, we'll hold one second and see if there's anybody else that wants to ask a question.

Lee Carter, a Private Investor.

I didn't hear what Mark said the book is today. Is it 10 something, book value?

$10.15 (multiple speakers)

The statement is. Okay.

$10.15.

Okay. Last year, in '08, you had $13 million in bad loans that you were working on. Have any of those started to work out for you?

I'm just trying to remember who was in the portfolio. We have our same bus company and that continues to be about where it was before.

Okay. All right.

And -- sorry. Our, out of Lexicon, so that's gone. That was a syndicated loan. But one that's still giving us the problem, I say problem -- what happened is our bus company, the counties are short of cash, so they can't buy busses. And so that was a material part of their business. They obviously have other parts of the business where they fix busses and trucks and do all kind of other stuff. They actually outfit police cars, and so they are very geared into a lot of different businesses.

But the bus sales, they won the bid for the county last year. I'm trying to remember the numbers correctly, so don't hold me to it, but it was something like 100 some busses that they had won. But the county only bought about 20 something, I think, if I remember right.

No, money?

Yes. So they just don't have the money. And until the counties either get government funds or state funds or funds from somewhere, or float a bond. Many times the counties will float a bond and be able to buy the busses that way.

They obviously can't run those busses for a long time and you are talking about Phoenix and Las Vegas, those are long distances those busses run, so they are not going to be able to run them forever and at some point in time, they will start buying busses again, and I think our Company will do well then, but we've just got to wade through it. They are right now paying all their bills and can crank along. But I think they will be fine when the busses get back in.

Okay. On your balance sheet, what are you valuing the senior secured loans at, David? What percent discount? Sixteen was the last [year], seemed to me what we kind of heard.

I'd have to do a quick number here. I don't have just the senior syndicated loans busted out. What do they look like there? We're scrambling.

Close.

They're 76%.

They're about 76% of cost, the senior syndicated loans.

Okay, so there's only a little bit. Yes. Any sellouts possible in '09? Or nothing talking about now?

No, we've talked about a couple of the companies. It's very hard to sell when you are in a recession, because everybody discounts future cash flows so badly that it makes it difficult to get a decent price. We have one or two of our companies that we have talked about. We've actually had people in to see a couple of the companies. But no transactions that we can announce today. Just some indications of interest.

How much -- if things open up that you could invest in several companies, how much do you have available? What kind of total investment might you make if it was possible? In other words, with the money you've got and where you stand today, could you make another $50 million in investments or what?

No, the only way to -- well, just two approaches to it. First of all, if we had to borrow the money, our line of credit is $125 million and we've got about $114 million drawn on it. So we don't have a lot of money to make new investments from our line of credit. However, as you heard, Dave Dullum talk about it, the desire, if we found the right deal, would be to sell off some of the senior syndicated loans and make that investment.

At this point in time, Lee, the real problem for me right now is making any investments given this economy that we are in, and we haven't seen the turn. We're seeing good indications, but we haven't seen the turn that we normally would see before we start investing heavily. And so that's really the biggest problem for me right now is if I had a lot of money, I'm not sure how much I would put out given the set of circumstances that we're trying to invest in.

As they say in the business, and you know better than me, don't bite the tape. And when the tape is going down as it has been, I've watched in March of last year, we thought the world had turned and started to look very heavily in doing buyouts and by the summer, of course, it was miserable again.

And then, we said well, this is the bottom and we're looking and feeling pretty good about that and then, of course, October, November and December were just disastrous periods of time. So now January has come along. It has not been much stronger. We've seen some good news in the January numbers, but still the marketplace hasn't told us that it's time to make a lot of new investments. So given the fact -- that fact, I wouldn't look to us doing a lot of transactions in this quarter.

Well sitting here, I don't blame you. I tell you. It is not good. It's by far the worst we've ever seen, by far what's going on here. Anyway, would the three of you accept the four paws up for the last quarter in '08?

What does that mean?

Very happy. One of you has got to know that. (multiple speakers) puts his four feet up in the air because you're rubbing his belly.

I wasn't sure what you were saying there for a minute, Mr. Carter. You got me worried.

His belly. It's called four paws up. It's pretty (technical difficulty)

Paws up. I got it now, okay. That's very good and thank you for the compliment.

And this quarter, we're jumping through the hoops.

Oh, I tell you. It's scary. I don't care -- you've done a very measurable job. American Capital I see really in trouble. Anyway. Thanks and I will be talking to you.

All right. Any other questions, Claudia?

Adrian Day, Adrian Day Asset Management.

Hi, David, hi. I just wanted to go to our last conference call in November, admittedly a few months ago, I believe you kind of said you hope to have -- to be earning a dividend by the end of March and you sort of touched on that today. Do you have any sort of new estimate of when you might be earning a dividend?

Yes, we apologize. We flunked on that estimate and guess. That was a mistake on our part. We just hoped we were going to do it, I guess, and we didn't quite get to it.

My guess is now that we will be earning it maybe by the end of September. But given the economy, I'm just not sure where things are right now. And so we are very skittish about making any forecast.

Right. The mistake was probably mentioning it.

Yes, that's okay. We like to tell our shareholders what we're thinking whether it comes out to be right or wrong. It's better to hear from management what we think might be happening.

I've got you. Thank you.

David West, Davenport & Company.

Good morning. Actually, I guess the question kind of follows in the vein of the last questioner. To what extent does the Board think about reducing the dividend more in line with net investment income given the capital constraints of this market? It seems like the marketplace may actually welcome that, even though it would be a lower dividend payout.

Well, the Board does consider it. We looked at the numbers this time. We looked at the forecast for them the fiscal year that will end -- our fiscal year is March 31, '09 for this year, which we're well into. And the Board did look at the projections for 2010, March of 2010. We went through the numbers, talked about it, and there are so many variables right now that are just -- we are unable to determine what they are, that the Board has voted in favor of continuing the distribution.

And my guess is that when we look in April, early April, that we will continue the distribution at least another quarter to take a look and see what's going on. I really don't think there's any reason to cut the dividend because my guess is that we will begin to earn it. I think pricing is going to start to move up, and I also think that we're going to be able to move some money at some point in time out of our low-paying loans into our higher-paying loans, even though it will cost us some loss of equity.

But it's such an unusual marketplace right now with so many variables that are undetermined that we're sort of trying to figure out which way the wind is blowing. And January wasn't good for many things, but the fact that we're working with a lot of banks now that do revolving lines of credit, I'm really surprised how many we've got on the list now that are indicating that they are interested in making short-term revolving lines of credit to our smaller businesses. And I feel the marketplace has changed in that regard.

The big problem, as you all know, I'm sure many people know this. Banks, by the end of 2007, were not the major lenders that they had been in the past. They had been surpassed by nonbank lenders and there were hedge funds. There were companies like ours. There were many other lenders in the marketplace and actually the most of the loans were being made by those groups of lenders, rather than the banks. Of course, many of those have gone away now. Lehman Brothers, to be an example were big lenders and they're now gone.

The point being of that is that the banks now have to take up the slack for the lenders that have gone away. And they are taking up some of the slack in the shorter term, but there is still no long-term lenders out there for the smaller businesses. And that's what we were hoping that the stimulus bill would do something in that area.

I can tell you there are many smaller lenders out there that would be delighted to have 5% preferred stock from the TARP, and would lend it out to small businesses and create a lot of jobs and a lot of goodwill in the marketplace.

But right now, the biggest problem for small businesses is getting some long-term capital, either debt or equity, and the short-term seems to be much better than it was, certainly, even 60 days ago. So I'm optimistic that things are turning and that rates will come up.

You've already seen some of the government numbers come up. And my guess is that within six months, we will see some real big changes. So that's the guess that we're trying to make.

Very good. Thanks so much.

No, sir, we have no questions at this time.

All right. Well we thank you all again for calling in. Sorry about the loss of the line. We will try not to hit the speaker -- the button next time as we move the phone around. And thank you all for calling in, and that's the end of this conference call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.