Gladstone Investment Corp (GAIN) 2008 Q4 法說會逐字稿

Welcome to the Gladstone Investment Corporation fourth quarter 2009 financial results. 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 Investment Corporation. Thank you. Mr. Gladstone, you may begin.

Thank you, for that introduction, hello and good morning to all of you have dialed in this morning. I'm David Gladstone, Chairman, this is the quarterly conference call for shareholders and analysts for Gladstone Investment trading symbol GAIN. Again, we thank you all for calling in, we are so happy to talk with shareholders, we would like to see some of you when you are in the Washington DC area come by on the (inaudible) out of Washington DC. We have a great team and would like you to come by and say hello. I do need to read the statement about forward-looking statements so let me do that.

This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and Securities Exchange Act of 1934 including statements with regard to the future performance of the Company. These forward-looking statements inherently involve certain risk and uncertainties even though they may be 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 risk factors in our periodic filings filed with the Securities and Exchange Commission and those can be found on our website at www.GladstoneInvestment.com and also on the SEC website. We would be glad to mail you a copy if you don't have them. 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. Let's get started first, we'll hear from our President David Dullum, he's President of the Company, he will cover a lot of ground including views of the future of this fund. David, go ahead and take it away.

Good morning everyone. First just briefly recap our business. We are an investment firm established to invest principally in bio transactions where we buy small businesses with with their management teams and private equity sponsors. We are long-term investors. The products for this market that we offer are primarily mezzanine, subordinated debt investments which we combine with a equity coinvestment feature. We accommodate and facilitate with these products the private equity sponsors and management teams in their ability to achieve the necessary leverage for a buyout transaction. The, as we know, this continuing restrictive environment for a typical asset based and bank senior term loans has led to a decrease in this type of leverage which in turn actually increases the demand for our products. Through mid calendar '08 in addition to these primary investment products, we had built an investment portfolio in senior syndicated loans of large and middle market bios.

As we have mentioned on previous calls, this was never intended as a long-term investment strategy but really as a class of assets that we could liquidate as needed to fund our principal investment activity meaning the longer term mezzanine type investments. This portfolio of syndicated loans has also been affected by the lack of liquidity in the financial markets so our strategy has been to be prudent in liquidating these loans to minimize the losses while no new purchases were going to be made.

I would like to then address our principal activity, which is the buyout business. For the 12 months ended March 31, 2009, we invested in three new buyouts for a total of approximately $37.9 million and made one add on investment of $3.8 million in one of our portfolio companies which facilitated an acquisition on their behalf. These investments were all made through the nine months ended December 31, 2008, with the most recent investment being the buyout of CCE, a large independent golf car 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 core investment, which in fact reflects our investment mix strategy. Our new investment production in the fourth quarter ended March 2009 was curtailed, as we are fully engaged in redoing our line of credit and as a result no new investments were made in that period. We will discuss this at more length.

There were no exits or buyouts during the year. Although in the quarter ended September we did recapitalize one of our buyouts, Quench, in which a private equity firm made a 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 as an affiliate investment. It's still early in our life cycle to really expect exits and any realized gains from the buyout portfolio. However, we do continue to evaluate these investments and in trying to plan ahead when the financial markets improve, and we think values are appropriate we will be in a position to exit and take realized gains as we deem necessary or appropriate.

After the end of the quarter no new buyouts, nor did we exit at the end of the March quarter. However, during April 2009 subsequent to the end of the quarter we did execute a few transactions with certain of our portfolio companies and I'd wish to review those now. First Ace Stucky, which is one of our very good buyout acquisitions repaid us a portion of their senior term A, $1.6 million, and about $413,000 on their senior term loans for an aggregate of about $2 million. Ash Holdings, which is one of our other buyout investments made a repayment to us of approximately $1.1 million on their revolving line of credit that we had to them. Three, we entered into an agreement to reduce the available credit limit on Massey Investments revolving line of credit which is held by Gain from $2 million to $1 million. Four, we entered into an agreement to reduce the available credit limit on Chase Holdings, another buyout investment on its revolving line of credit which held by Gain from $4.5 million to $3.5 million. And finally, (inaudible) Two holdings refinanced its line of credit which resulted in being able to make a cash payment to us of about $850,000 which went to reduce our term A and B loans and also the termination of our line of credit of $3 million at that time. These were all good opportunities in activity reducing some of the lower yielding investments in these various portfolio companies and subsequent to the year end and the quarter end.

Turning to our syndicated loans, during the quarter ended March 31, 2009, we received payments of about $2.1 million from the sales or settlements of syndicated loans including normal amortization. Additionally, we settled one of our syndicated loans, RPG through a bankruptcy petition in which we received approximately $3 million in senior term notes from American Greetings, which took the Company out of bankruptcy and $900,000 in cash, which caused us to recognize a realized loss of approximately $601,000 on this investment. For the quarter end, after the quarter end, regarding these syndicated loans and as we mentioned earlier, we had intended to sell our syndicated loans when prudent and as a means to fund our principal investing activity or to pay down on the line of credit from time to time. However, in the process of paying off our line of credit with Deutsche Bank and in establishing a new facility led by BB&T, which we will discuss more fully later on, we did sell the majority of our syndicated loans in April and may. These sales resulted in proceeds of approximately $69.2 million, with a cost of approximately $103.8 million, for a realized loss of approximately $34.6 million. We should emphasize we did not want to sell these loans and not intended to sell the loans if they were all paid as agreed. However, Deutsche Bank wasn't willing to renew our line of credit under acceptable terms so we had to sell these loans on an accelerated schedule in order to pay off the line and reset our revolving line of credit.

Current status of the fund at the end of March quarter we had $226 million invested in buyout at cost and $123 million invested in syndicated and nonsyndicated loans for a total portfolio cost of $349 million. The fair value of our portfolio at that time was about $314 million, so the aggregate unrealized depreciation through March 31, our fiscal year end, was approximately $35 million. In other words the portfolio at that time was valued at about 90% of our cost at March 31. A significant amount of this unrealized appreciation had occurred in the June and December quarters. For the quarter ending March 31, the overall quarter over quarter depreciation was about $6.2 million, or approximately 18% of the cumulative depreciation. Subsequent to the quarter end, and taking in to account the sale of the senior syndicated loans and the refinancing of some of our proprietary deals our portfolio now consists of approximately $221 million invested in buyouts at cost and about $19 million invested in remaining syndicated and nonsyndicated loans for a total portfolio cost of about $240 million, and this approximates a fair value as the date of the 10K filing this morning. This will all show up in our June 2009 statement.

Turning to the credit facility changes. In April we entered in to a second amended and restated credit agreement providing for a $50 million revolving line of credit, which was arranged by BB&T Bank and included KeyBanc. This replaced the previous facility which had been provided by Deutsche Bank. We drew down borrowings of $43.8 million under this new credit facility, which were used in addition to the proceeds from the syndicated loan sales previously mentioned to make a final payment to Deutsche Bank in satisfaction of all and paid principal and interest owed to them under the prior credit agreement. The new credit facility may be expanded up to $125 million through the addition of other bank lenders to this facility. This BB&T facility matures on April 14, 2010, and if the facility is not renewed or extended by this date, all unpaid principal and interest will be due and payable within one year of that maturity date, which would be April 14, 2011. We are working with lenders to try to get them to join our line of credit and increase it, as mentioned it can go up to about $125 million. To protect against potential interest rate volatility, we also did enter in to an interest rate cap agreement for an amount of $45 million, that would effectively limit increase in the interest rate on that portion of the borrowings under our line of credit with BB&T. For this we incurred a premium fee of approximately $40,000, giving us this interest rate cap.

Turning to our record and since our inception in July 2005, we have completed 13 buyout investments for a total of approximately $226 million at cost at the fiscal year in March, 2009. With no capital gain exits from this buyout portfolio. However, during the quarter and subsequently we have successfully been repaid on lower yielding loans and therefore reduced our line of credit commitments from similar portfolio companies aggregating around $7.9 million. Since July 2005, we purchased 72 loans in that senior syndicated market for a total of approximately $305 million. The current balance as mentioned as of today is about $19 million at cost, and over time we will exit these remaining syndicated loans with those proceeds directed toward our buyout activity and paying down further on our current line of credit as necessary.

Generally our buyout portfolio is weathering the current economic environment and performing well considering the circumstances. We do have a few specific companies that are under performing and more challenged than others but really with one nonperforming asset which is in Ash Holdings which we value at about $2.9 million has a cost of approximately $10 million. But we do not believe that we would see losses in our portfolio as we have an experienced portfolio management team that is very focused and proactively monitoring these companies specifically and the portfolio generally and providing assistance as necessary to minimize the deterioration in value.

As to loan ratings our average loan ratings for the quarter remain relatively unchanged. The risk rating system that we use set our originated loans at an average of 5.5 for this quarter, which is slightly down from the December 31, quarter. The risk rating for unnrated syndicated loans was an average of 8.0 for this quarter, with a slight increase from an average of 7.9 from the December 31, quarter. The risk rating system gives you a probability of default rating for the portfolio on a scale of 0 to 10, with 0 representing a high probability of default. We see the risk in this portion of the portfolio staying relatively the same as prior quarters. As to the rated syndicated loans that we have they had an average rating of BB2 in the quarter ended March 31, which was unchanged from December 31, quarter end.

We are satisfied with our current portfolio mix and as previously mentioned we are moving towards focusing exclusively on buyouts and ultimately the few remaining syndicated loans will be reduced in our portfolio. In terms of fixed versus variable rate loans we had concentrated on variable rate loans in the syndicated market so that we were not adversely impacted if rates increased and our cost of borrowings increased as a result. However, rates have come down as we know, significantly, so we have seen a reduction in our income through March 31, on the senior syndicated loans. On some of our buyout loans we do have variable rates but we almost always have a minimum or floor in the rate charged so if interest rates decline it will minimize the impact on our ability to make distributions and as previously mentioned we have purchased an interest rate cap on $45 million of the debt of our new credit facility in order to have some protection on our cost of funding if interest rates rise. We have about $61.1 million at cost in fixed rate loans all of them in our buyout deals. They are at relatively higher rates. So I think we should be okay there.

Looking forward, we continue to worry about the economy, we'll be diligent in out pursuit of new opportunities to make sure that they are worth the risk of investment. While we continue to seek new mezzanine and equity coinvestment opportunities we have purposely limited our pipeline growth. In terms of the marketplace however, a major impact on this market is this continuing limitation of senior loan availability. And as senior lenders continue to limit their products primarily asset based loans, with little tolerance for cash flow loans, it is difficult for the buyout funds who we work with to raise the necessary capital for individual deals. This results in one, valuations tend to be - have declined relative to EBITDA. Two, the private equity firms are required to invest a higher proportion of equity relative to debt. We've received this up around 50% from 30% not all that long ago. And third the opportunity for mezzanine equity coinvestment has grown this is a traunch of investment which now fills the gap between the senior lenders and the equity investors. These factors indeed are to our advantage and we will continue to concentrate on this area and build our pipeline, however, the current economic climate has placed a premium amount investing patients and greater emphasis on the due diligence phase and on business analysis, since the visibility for revenues and product demand remains uncertain. This will naturally limit our investment activity.

As we now continue to participate in buyouts our balance sheet will reflect this mix of debt and equity coinvestment that we have provided for 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. As previously mentioned, we no longer invest in senior syndicated loans though we will actively monitor this market as we do have these three remaining loans and would expect to sell these at prices that we deemed reasonable. Terms of our goal and the outlook for this fund, it continues to be the maintenance and consistency of our distribution to shareholders while achieving solid growth in the portfolio of proprietary investments in the small business buyout market. In this regard we have previously declared our per share dividend for the quarter ending June 30, 2009, at $0.04 per month or $0.12 per quarter. We look to maintain this level of distribution and working diligently to grow our income and therefore our dividend payout. Thanks very much, I will turn it back over to David Gladstone.

Thanks, Dave, that was a good report. We are very encouraged by the future of this fund. Now let's hear from our CFO, Mark Perrigo.

Thank you, David. We'll begin with our balance sheet. At the end of the March quarter, which is also our fiscal year end, we had approximately $327 million in assets consisting of $314 million in investments at fair value and $13 million in cash and other assets, we had about $110 million borrowed on the line of credit. And had about $215 million net assets, so we were less than 1 to 1 leverage. We had a net asset value of about $9.73 per share. This is the lowest it's ever been and is largely related to the depreciation of the syndicated loan portfolio. We believe this to be a very conservative balance sheet for a Company like ours and we believe our overall risk profile continues to be low. As Dave previously noted, we terminated our credit facility Deutsche Bank in April of 2009, and entered into a new credit facility led by BB&T Bank for up to $50 million. We initially borrowed the $43 million to repay in part our old line of credit. We currently have about $29 million outstanding under the line of credit with BB&T.

Turning to the income statement, for the March quarter end total investment income was approximately $6 million versus $6.9 million in the prior year quarter, while total expenses including credits were approximately $3 million, versus $3.4 million in the prior year quarter. Leaving net investment income, which is before appreciation, depreciation, gains or losses, of approximately $3 million versus $3.5 million for the quarter last year, a decrease of about 14%. For the fiscal year ending March 31, total investment income, $25.8 million, versus $27.9 million, for the same period last year while total expenses, including credits $12.4 million, versus $14.8 million in the prior year. We have, net investment income of approximately $13.4 million versus $13 million in the prior year. An increase of about 2.3%.

Now turning to unrealized and realized 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 unrealized appreciation, versus depreciation, as recognized in our statement of operations as that non-cash accounting from the change in fair value on the portfolio during the quarter. Regarding realized losses for the quarter ended March 31, we had approximately $807,000 in realized losses due to the sale of one syndicated loan, while for the fiscal year end we had approximately $5 million in realized losses. Relating to unrealized depreciation for the March quarter end, we had approximately $6.1 million of net unrealized depreciation and $19.8 million of unrealized depreciation, for the fiscal year over our entire portfolio. This is non-cash and again comes from the value placed on the portfolio. Although our aggregate investment portfolio has appreciated, our entire portfolio was fair valued at 90% of cost as of March 31, 2009.

The unrealized depreciation of our investments does not have impact on our current ability to pay distribution to stockholders, it does indicate the value is lower, and there may be future realized losses that could ultimately reduce our distributions. As previously mentioned in our December earnings call and 10-Q filing we made a change in our valuation procedures to value senior syndicated loans using a discounted cash flow method versus relying on third party indicative bids. Given the continued economic downturn the quarter ended December 31, the market for syndicated loans became increasingly illiquid with limited or no transactions for those securities in which we held. Accounting guidance was issued in September 2008, specifically SFP137- 3, which provides guidance on determining the fair value of assets when the market for that asset is not active. The guidance number then in the current economic arena there may be indications of an illiquid market that may include a significant decline if the volume and level of trading activity in that asset. Pricing quotes are varied significantly over time amongst market participants or prices that are not current. We concluded at the time that the marketplace from which we historically attained indicative bids for purposes of determining the fair value of our senior syndicated loans show the attributes of illiquidity.

Due to the continued market illiquidity and lack of transactions during the quarter ended March 31, we believe we could not rely on an active market to value our remaining syndicated loans. Therefore, alternative procedures were performed and we continue to perform until liquidity returns to the marketplace.. However as Dave noted earlier we did sell the majority of our senior syndicated loans during April and May. These loans were values and the sales price we received in the marketplace regardless of whether the bid was deemed to be inactive or an illiquid market, as a sale price would be the far value bid placed -- agreed upon us between us and (inaudible) at the date of sale. Therefore as of March 31, we had three remaining senior syndicated loans using our discounted cash flows.

Now let's turn to net increase or decrease in net assets from operations. This term is a combination of net investment income, unrealized net appreciation or depreciation and realized gains and losses. Please note that we are talking about weighted average for the diluted commons shares, when we use per share numbers. This is the most conservative way of stating earnings per share. For the March quarter end, this number was a decrease of about $4 million or $0.18 per share, versus a decrease of about $10 million or $0.60 per share in the prior year March quarter. The change is primarily due to a greater amount of net unrealized appreciation over noncontrol and nonaffiliated investments, realized losses during the year and a dilution of the common shares of the rights offering. While we believe our overall investment portfolio is stable, it continues to be expectations with the continued investor uncertainty and the current economy and credit markets investors should expect continued volatility in aggregate value of the portfolio.

As of March 31, we do not have any kind of loans with paid intern income or original issue discount income. We term this kind of income phantom income because a company does not receive the cash but would rather have to pay off his phantom income as a dividend. We avoid such phantom income. Our overall portfolio of companies are paying on time as agreed with exception of one proprietary loan. This concludes my presentation. David?

Thank you, Mark. That was a good summary of our financials. I hope each of the listeners will read our press release and also obtain a copy of our annual report called a 10-K which as been filed with the SEC. You can access that also on our website at www.gladstoneinvestmen.com and also on the SEC website. If you write us or call us we'll also mail you a copy to make sure that you have all the information you need to follow our Company.

I think the big news for this quarter and after the quarter end was a change in our line of credit and the sale of so many performing loans. We certainly when we were talking to you back in I guess it was January, we didn't think we were going to sell these but unfortunately we had to. We got the shock of our lives when we met with the Deutsche Bank people and they told us they didn't want to extend our line of credit. And at the same meeting they began to waffle on that and discuss an extension of the loan. It was difficult for us to determine if if they were going to make the loan or not going to make the loan or going to extend the loan. We did negotiate with them for an extension and the terms seemed to change each time we talked to them. We felt we could not take a chance with them in extending the loan and therefore we set out to arrange some new lenders for us, and at the same time selling some of our portfolio of syndicated loans in case we had to pay off the facility completely.

We are happy to say that BB&T and KeyBanc both said that they would lend us the money and they came forward to help us pay off Deutsche Bank. We were obviously very unhappy that we had to sell so many of our performing loans and pay down the line of credit from Deutsche Bank. We took a beating on the sale of the price of the loans that we sold but, it was really the only way we could be sure that our Company was not going to be in default on the line of credit with Deutsche Bank. As a note, we have never had a default on any of our lines of credit as long as we've managed companies. It was a bitter pill to swallow to sell al those loans and after all we've never had a default and never missed a payment and we have been model borrowers, unfortunately Deutsche Bank explained that they had been ordered from their folks in Frankfort Germany that they should get out of all the middle market lending. They lauded us for all our good record and our fine relationship with them but they wanted to be repaid. They told us that Deutsche Bank needed to have the liquidity. You may have been reading some of the stories about the situation at Deutsche Bank, and their decision to get out of our type of business. It was very damaging to us because we had to sell so many of our loans at a discount. But at the end of the day we are out of that now and we are on to rebuilding our line of credit with other lenders and looking forward to ways to grow our assets at this time.

We are also looking for some long-term debt at this time. We're working with some of the insurance companies, we hope we can come up with a credit line there, we also intend to apply for a SBIC license so that we can get some SBA money. We hope that they will grant us a license in this Company as well. Stay tuned to hear how we do this summer as we put the Company back on solid footing.

The sale of our assets also put us near to missing our regulated investment company test. This is called the RIC diversification tests. This test requires us to be highly diversified in our investments at the end of each quarter. We will have to work a little harder to get out of this situation. If we fail the RIC diversification test, we cannot make new investments until we can comply with the diversification test we can continue to payout our distributions that's not in jeopardy it just affects what we can do going forward. I think we will be okay here but we just need to raise the issue to you so everyone knows the situation. We will be working on this and we'll be back to you on that situation as it develops.

You know all of our worries are still around the same things we see the cost of oil going back up again because the economy is coming out of recession and there's more and more demand for oil and gas all over the world. Trade deficits with China continue to grow. China subsidizes its businesses and they sell their products to us under the free trade agreement. We can't compete with them. Very difficult for our businesses in the United States.

We are beginning again to worry about inflation. The way the government measures inflation. It's not likely to seem that we are in an inflationary world. We see the other side of that, and I think you are going to see a lot of changes by 2010 in all manner of prices. The amount of money that's being spent in the war on Iraq and Afghanistan is still hurting the economy. We think our soldiers are wonderful people and we certainly support our troops and all the that they do for us, but again, the war spending is draining our economy.

The worst thing that's going on of course is the pork barrel spending by federal and state governments. I still believe they are acting irresponsible, government is spending trillions and trillions of dollars on wasteful projects, and these are not stimulus spending, this is much more politically motivated spending of paying off people that have done favors for politicians. Of all the money spent, very little is aimed at small businesses and this is really unfortunate, this is a mammoth mistake, because small businesses create 80% of all the new jobs and this new spending is missing the opportunity to stimulate the small business area. Stimulus bill will not create long-term employment it will just delay the time it takes to layoff those people that probably should have been laid off years ago.

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 business seems to be avoiding the traumas endured by those industries. Many of the entrepreneurs and small business people that we know are really savvy, they've kept their costs low, and many of the business profits are in good but we all know there is a slowdown, we see it in a few of our companies that are in the portfolio today. Businesses and also the businesses that have approached us for financing. It will take some time to get through this difficult recession, I'm not sure we will be out of it by the end of 2009 now. But employment is lower than we had forecast and the affects on industry and financing autos and housings and all the layoffs are certainly widespread.

The backlog orders that are coming down for some of the businesses, but others have very good backlogs and actually some of our businesses are having their best quarters ever. The business outlook however for autos housing and finance still looks to be a pretty disastrous recession. Those outside of autos, housings and finance seem to be a pretty normal recession as recessions go. We have been lucky and stayed away from auto manufacturing, we said away from housing and mortgages and finance companies. We do have some investments that touch on these areas. They will be affected certainly but we missed the big disasters. I think we're near the bottom of the recession, and I think it will be flat for a while or not go down as much as it has gone down. I think things will turn around and we'll see, certainly the stock market is indicating that the turn around will be in 3 to 6 months. I think this Company will be doing fine over the period.

I was annoyed again this morning to see another unfortunate report from Reuters coming out of Bangladore, India. Reuters, reporting accurately of course, that we sold some of our performing loans but they also stated we are exploring strategies for capital raises including equity raises. We are not looking for any equity raises right now. We are looking for long-term and short-term debt as I mentioned before. It's been mentioned in this report. It also reported in Reuters that nonperforming assets may continue to rise I mean, folks, the rate was 2.9%, at March 31, and my best guess is that our worst case is in 3 or 4% area over the next quarter or two. So continue to rise from what to what I guess is something they didn't mention. Says we are looking to increase our short-term investments so that we can pass our RIC test, that's true.

We are looking for short-term lines of credit that would help us pass our RIC test by letting us get into more diversified investments, and it said we are unsure about our new investments. Well, everybody is unsure about their new investments now. We are worried about the economy. We need longer term capital rather than shorter term capital. We really can't use a lot of short-term capital borrowings to make long-term loans so sure we are unsure about our investments but I don't think we are any more unsure than anybody else is in this marketplace.

Just to go back now our distributions declared by the Board of Directors, we had to cut it to 4% per month for April, May and June. This is a run rate of about $0.48 a year. We had so much trouble with our bank loans that we had to go back paying out ordinary income even though we have a tremendous amount of equity in this Company. Payments are now around our ordinary income, and our banks are requiring us not to payout more than our earnings in order to preserve capital. Now we have to get busy and build the income back up. I think selling off a lot of these senior syndicated loans with variable rates that were very low will help us get back there pretty quick.

This distribution rate on our $4.65 share price, is about 10.3%, based on yesterday's price, we bounce around between 10 and 12%, that's an extremely high yield for such a good solid Company. We really have no plans to reduce the distribution and this means that buyers of the stock are getting I think a fabulous return today. Please go to our website and sign up for email notification service. We don't send out junk mail just news about your Company. So you can go to Gladstoneinvestment.com at the site and sign up for that.

So in summary, as far as I can see in calendar year 2009 I think it looks extremely much better than 2008, 2008 was a brutal year for almost everybody in the business. But as you know we can only see a few quarters out, we are stewards of your money, we are going to try to take care of it as best we can. This quarter even though it's been extremely difficult for us I think we will see the rest of the quarters in 2009 to be much better. This summer will be our turn around from a difficult times as we are getting new lines of credit and hopefully some long-term debt as well, get that -- get this bad period behind us and move on to a new year that will end in March 31, 2010. And I think that will be a much better year for us. Now let's have some questions from the analysts and our shareholders. Operator if you will come back on and give instructions for that, please.

Thank you. (Operator Instructions) Our first question is coming from Vernon Plack with BB&T Capital Markets. Please state your question.

David, would like -- you mentioned this, as it relates to Ash Holdings, which is your one investment on nonaccrual did you say that you reduced the availability under that revolver?

Yes. They've gone through a reduction in their size and they've gotten themselves back so that they can start paying interest on our loan, as you know, that was a nonaccrual for a while. We are feeling much better about them. Also they are in a business, this is the yellow school bus business for those who don't remember the Company and they are really a distributor of sorts of those yellow school buses manufactured by one of the large manufacturers of buses. They are out in Phoenix as well as Las Vegas. They win the contract for those buses each year. Unfortunately the school districts and the counties and cities where they have those contracts have not been able to have the money to buy as many buses as they would like to buy. As a result they have had a reduced purchase over time. But that seems to be perking up now and we are hopeful for the next year, 2010, they will have very solid sales and things will go on. So we've gone forward on that one pretty well.

This is Dave Dullum just to add to that we actually did not reduce the line commitment. They actually generated cash, they were able to paydown on the line, was obviously a good move for them financially, so just wanted to clarify that their availabilities there, they just were able to actually pay down on the line.

Great. Then the next question, David, I think you answered this, partly, was just perhaps looking for a little more color you talked about some of the difficult industries out there right now, of course, the auto industry bing one of them, and with all the news around that industry I do notice that in terms of industry classification, the automobile industry is one, I think you've in terms of portfolio companies represents about 4.6% of your portfolio at fair value, any impact from the GM reorganization and--?

No. One of the companies in there is Defiance Stamping and the plant that they sell to is not going to be shutdown. We just looked at that. Also that company is mostly in the truck side in Glad, and so as a result we haven't seen any impact in this company that much. As a result, if you look across our total portfolio of both Glad gaining good, we are just not seeing a big hit there, mainly because we stayed away as much as we can.

Thanks very much.

Other questions.

Our next question is coming from Jon Arfstrom with RBC Capital Markets. Please state your question.

Good morning, guys. Question for you on, just maybe long-term funding mix, maybe, if you could first touch on the SBIC license and how far along in that process you are?

We are just beginning to work on that, unfortunately as you know, we started on Glad first so we put the license in, we are waiting for that to be approved before we go for another license. We have the package pretty much put together and are ready to go forward. SBA is being pretty good about looking SBIC licenses because they've been given a mandate to use that as the best way they can to help small businesses. We would love to see the TARO money come in to the SBIC industry, but unfortunately looks like that's not going to happen. Right now we are in the early stages of applying for that. In terms of some of the insurance companies we have contacted some insurance companies, gotten some turndowns and gotten some people that are looking at it. We'll just have to see how that comes out, John.

Okay. It would be nice to have a little pit of TARP money in the program. How long do you think that process is likely to take on the SBIC license?

SBIC licenses have been slowed down completely because of the change of administration. We are expecting at least six months maybe nine months from start to finish simply because they are reorganizing themselves in to -- just to give you a flavor of it while they do have an SBA administrative has been confirmed and she is on the job doing what we hear is a good job down there, there is still a lack of appointments at the mid level for the political appointees, and as a result she doesn't have a lot of help from people that she needs. So as a result things have slowed down on the SBIC side. We hear in many of the other programs as well. That's to be expected when you have a change of administrations it does take a while for things to get started again. I think by midsummer they will have all of those people in place and things will go a lot quicker.

Okay. I guess my view of that is that assuming the license is granted that that would be a material positive to some of the funding questions that you have, do you share that view?

I think that's true. Once we get a license and would have access to the SBA money or whether we got a long-term debt commitment from somebody both of those would be something we would announce in a press release.

Then the second question here, ow much equity coinvest appetite do you have at this point? I understand that there is probably a greater opportunity than there has been historically, but what kind of appetite do you have as a fund to increase the percentage of your investments in that asset class?

Jon, this is Dave Dullum, I will try to tackle that. I think the way we think about perhaps in the market when we are out there trying to find deals, and because of our orientation obviously to distributions to shareholders what we try to do as we look at a net new deal, is think about for every dollar we might invest in that new deal, roughly 15, maybe 20% will be in the equity coinvest piece and the balance will be in the mezzanine higher yield so we always strive for a blended yield. That gets us where we need to be. I think that's the best way to answer. The short answer would be we obviously have an appetite in terms of subject to constraints we are working under generally. But I'd say anything we do would be in the 15 to 20% of every dollar we would try to invest. That's our general plan.

John just to piggy back on that. In terms of new investments, we are holding back new investments right now mainly because we are not sure that this is the plateau before the recession begins to, we begin to climb out of the recession. We are very mindful of the fact that there could be another strong leg down in terms of economic downturn and hurt any kind of new business. It's very hard for us to make projections for not only our existing portfolio but anybody new coming in to the fold so that's been the first thing that's held us back.

The second one of course is that we don't have long-term debt in our portfolio in terms of the liabilities. Building a portfolio of long-term debt in the asset side with short-term debt on the liability side is not something we want to get into. That's what's hurt all of the BDCs including us building up large portfolio based on short-term debt all of us with the idea and the speaks of most of the BDCs with the idea that we were going to use securitization as a mechanism for going from short-term to long-term and the economy fell and none of us were ready for that. As a result got our lines pulled and you know the story at the other BDCs as well as I do. Our Company happened to have gotten through that by going through the liquidation of our senior syndicated loans and getting new lines of credit in place. And we are fortunate to be where we are today compared to some of the other BDCs and I think by the end of the summer you will see a strengthening of our Company in terms of what we are doing. What we have built on the asset and the liability side and hopefully when we report to you in July or so when we are finishing up the June quarter we may not have as much good news as we'll have in October when we finish up the September quarter. I think this quarter, this summer, the quarter ending June and the quarter ending September will be awfully good quarters for us. Simply because we've made the turn around of refinancing our debt. Other questions?

Just one question in terms of your RIC diversification test. Can you maybe go into a little more detail about how you -- really what tissue is, how you plan to manage it and maybe the steps that you can take--?

The issue is, as you can imagine is we have large investments in our portfolio. These are the buyout deals that we did. We balance that in terms of diversification with our senior syndicated loans, unfortunately due to Deutsche Banks backing out we had to sell our senior syndicated loans meaning that these larger loans took on a larger part of the portfolio. Once they exceed 50% of the portfolio, it means that you are no longer diversified according to the IRS definition of diversification and you can't do new investments until you fix that by selling off some of your investments. So we are in a situation now in which we want to go forward obviously, we are going to increase our lines of credit, we will borrow under those lines of credit and fix the problem, hopefully for June 30, and September 30, if we need to do it by then with the idea that during this period of time we will garner some long-term debt of some sort and as a result of garnering long-term debt we will make some additional smaller investments so the diversification is satisfied and therefore get our way out of this being very close to breaking our RIC test. This would be most likely be quarter end type transaction?. That's right. Other questions, please.

I'm showing no further quest at this time. (Operator Instructions) We do have a question coming from [Jeff Rudner] with UBS.

Good morning, David. Thank you for the complete, concise update of what happened through March 31, and certainly subsequent to March 31, I have a question regarding the comment you made about the $0.04 per month dividend going forward. You said on the one hand that the terms of the new loan agreement prevent you from paying a dividend greater than the net investment income. Yet with the reduction in assets with the renegotiation of the loan do you anticipate going forward that we will have a minimum of $0.04 a month investment income based on the remaining assets after the ones that were sold to pay Deutsche Bank?

We did -- and that's exactly right. Jeff, we set our projections and looked at our projections as if we were not going to make any new investments, we took what we believed was a relatively conservative approach to making these new projections and set our dividend based on that. Making new investments we usually receive some pretty substantial fees. In addition to that we normally get increased income when we do new deals in today's marketplace because rates are higher. Assuming somewhere along the way we are able to garner some long-term debt or we're able to fix our current situation on the liability side so that we are stronger and able to make long-term investments, you should see that earnings go up relatively quickly based on doing new transactions. At this point in time I can't give you much of an outlook on that because we are just beginning the process of -- after all, we just finished our negotiations in April and so we use most of May to get ready to go out into the marketplace and work with some of these long-term lenders. So once we get into that position and we've got our long-term lenders lined up and in place, then that will make us very aggressive in the marketplace going out looking for new deals and hopefully that will jack up our earnings and our distributions will have to go up.

Thank you, David.

Other questions?

Our next question is coming from Ross Demmerle with Hilliard Lyons.

Your interest income, suffered with the lower LIBOR rates, and I'm wondering with the -- your balance sheet as it is now, what would be a ideal interest rate environment for you?

That's the $64 question. Obviously with the interest rates going down, we are -- exited most of those situations so we won't have that problem currently going forward. Most of our loans that we have on the portfolio now have floors, or they're fixed rate loans in our buyout. So not as susceptible to the interest rate fluctuations. As you know we are not very leveraged on top of that so that the $50 million that we have as a line of credit, what are we at Mark, now in terms of borrowing -- $23 million? So we have outstanding only $23 million on that line. As a result of having so little on the line we are not in jeopardy with regard to the interest rate fluctuations on the liability side of our balance sheet.

We do want to change all of that over time obviously we want to leverage out. We'd like to level up at least 60, 70%, one to one kind of thing, and not be so under leveraged. If we can find leverage that is cheap and reasonable based on what we can put it to work at on the asset side. Interest rate environment as interest rates go up, we have on all of our -- a good deal of our portfolio is variable. And it will go up at the same time. And hopefully we won't have a huge interest rate up tick during the next six months because I think that injuries everybody when we have high interest rates. I would expect in 2010, interest rates will go up pretty substantially, simply because inflation will be back. That always hurts us in the long-term because it takes money out of the small businesses that are borrowing from banks and other lenders and takes it away from operations and those are not good things to do.

Thank you.

Other questions.

Mr. Gladstone, I'm showing we have no further questions at this time.

All right. Well, we thank you all for attending and look forward to seeing you then in July or early August. Thanks again 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.