Gladstone Investment Corp (GAIN) 2009 Q3 法說會逐字稿

Greetings and welcome to the Gladstone Investments third quarter 2009 earnings 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. That was a nice introduction. And hello and good morning to all of you out there. This is David Gladstone, Chairman, and this is the quarterly conference call for shareholders and analysts of Gladstone Investments, Trading symbol GAIN. Thanks all for calling in. We're always happy to talk to shareholders and would like to do this more often. Unfortunately we can't.

But, if you're ever in the Washington, DC area come by and see us. We're here in McLean, Virginia a suburb of Washington, DC. Please stop by and see us. However you may want to come by on a better day than today. We've got some pretty bad weather here with lots of snow on the ground. But if you do come by, you'll see a great team [at work] and I just think they are the best in the business.

Now, let me read a 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 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 certainly believe those plans are reasonable.

There are many factors that may cause our actual results to be materially different from any future results that may be expressed or implied by these forward-looking statements, including those factors listed under the caption risk factors in our periodic filings such as 10-Ks and 10-Qs that we file with the Securities and Exchange Commission. Those can be found on our website at www.GladstoneInvestments.com and also at 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.

First, we'll hear from Dave Dullum, our President. He is the President of the company. He'll cover a lot of ground including a view of this future of this fund. Dave, take it away.

Thanks David and good morning all. As a review our business objective for GAIN continues to be as an investor principally in buyout transactions of lower middle market companies with their management teams and their private equity sponsors. Our products are generally mezzanine or junior debt instruments combined with an equity investment in common stock or preferred stock, or with warrants to buy common stock. This approach allows us to be focused on primarily generating current income for dividend distributions and realizing capital gains to enhance the overall returns to our shareholders.

Our capital facilitates the private equity sponsors and the management teams in their efforts to achieve the necessary leverage for a buyout transaction. We may also find opportunities to provide capital in support of business owners and management teams who are not seeking to sell their company outright, but to achieve some partial liquidity through a recapitalization of their business or where they have a need for capital to strengthen the balance sheet or growth.

In this regard, I believe we are in a favorable environment for our type of financing due to the availability of asset based and bank senior term loans continuing to be a challenge for private equity sponsors in these leveraged transactions. These structural circumstances that I've described do expand the need for the junior debt and mezzanine tranche which is indeed what we provide.

We'll turn now to our buyout activity. For the quarter ending December 31, 2009 we committed to a new investment totaling about $1 million in A. Stucki for an add-on acquisition and we facilitate and an add-on acquisition in Chase Industries. Both of these industries are existing portfolio investments.

There were no exits from the buyout portfolio and we continue to plan ahead and are analyzing opportunities to recapitalize or exit from select portfolio companies at the appropriate time.

We previously reported that one of our control buyout portfolio companies had signed an agreement with an investment banking group to review strategic options. This process indeed is ongoing and as required we will report if there is a material event. Since this is a private company that we are referring to, we cannot disclose the discussion here and there is also no certainty at this time in the outcome.

During the quarter, we received approximately $4.5 million of principal repayment from companies in our buyout portfolio and we dispersed approximately $595,000 to these companies. During the quarter, one of our portfolio companies, Chase Holdings, refinanced our line of credit with a third-party and we received full payment on the outstanding balance of $3.5 million.

We also entered into an agreement with Danco, another portfolio company, to reduce available credit limit from $3 million to $1.5 million. And other company, A. Stucki recently mentioned, declared and paid approximately $953,000 in dividends on a preferred stock investment that we had in this company. This is equivalent to approximately $0.04 per share.

Finally through a disbursement of approximately $282,000 we bought out the other shareholders and assumed 100% ownership of Mathey Investments Inc. which is another one of our portfolio buyout investments. Subsequent to quarter end we extended to May 20 our line revolving -- our revolving credit facility Noble Logistics, which was previously due to expire in February of 2010. We continue our efforts to refinance lower yielding debt obligations and to pay down our line of credit, thereby reducing our interest costs and strengthening our earnings per-share.

Turning to our syndicated loans, during the quarter ended December 31, we received scheduled principal repayments of approximately $27,000 from the remaining loans. We also completed the sale of certain senior syndicated loans, HMTB acquisition [to and a portion of interstate fiber]. These loans in aggregate had a cost of approximately $6.8 million and an aggregate fair market value of approximately $5.5 million.

Upon settlement of these loans, we received approximately $5.5 million and recorded therefore a net realized loss of approximately $1.3 million. As we've mentioned before, we plan to no longer invest in syndicated loans and we will continue to liquidate the three remaining as appropriate.

Turning to status of the fund, at the end of the December quarter we had $213.7 million invested in buyouts at cost and $12.2 million invested in the three syndicated and one non-syndicated loan for a total portfolio cost of approximately $225.9 million.

Regarding our credit facility, we continue to pay down our line of credit with BB&T and KeyBanc and currently have about $15 million outstanding on the line, with $33 million available for new investments and other capital needs. We will continue to reduce the line as appropriate and are now in a position to utilize a facility to invest in new transactions which we are actively seeking.

Regarding an update on the portfolio, since our inception in July 2005 we have completed 13 buyout investments for a total of approximately $265 million at cost with no capital gain exits. The companies in our buyout portfolio continue to weather the current economic environment and are performing well considering the circumstances.

We do have a few specific companies that are underperforming, so our portfolio management activity which is a strength and important part of our investment management approach of working to limit losses and preserve cash flow from our portfolio of companies, is focused on and indeed is working with these companies. This portfolio management team continues to provide value-added services such as strategic and business planning. This is where we work with outside resources to assist these companies and continue to review their competitive positioning and talent resources among other key business metrics.

Secondly, operating management support. This is where we can tap experienced operating management talent on staff or from a pool of talent we've cultivated over the years. Third, we facilitate interaction between the portfolio company management teams which allows for exchange of ideas such as best practices, purchasing and manufacturing disciplines all of which are extremely important in this current economic environment. And fourth, we can provide expertise within our team such as negotiating the leases on the property occupied by a portfolio company.

An important point on all of this management capability really is that this is not a typical workout group which takes over after a company has defaulted or has slipped badly, but these are experienced operating resources that work with the portfolio company management and our equity sponsors to improve the company's operations and viability. This really is extremely important in these challenging times and adds value to our portfolio as we do not seek to aggressively defend our lender rights at the risk of damaging the business and its future, but to be a very good partner not only for management but also our equity sponsors and the lenders in those various companies. We take a long-term view as a result.

Turning to the market place as we would see it for these smaller companies in our purview, it continues really to be defined by two key factors. First the economy and second the lending limitations. Regarding the economic conditions, they continue to limit earnings and cash flow of the lower middle market companies though we are starting to see some pockets of stability. Therefore business owners are either delaying of their companies, seeking partial liquidity through dividend recapitalizations or seeking junior debt capital and equity perhaps for balance sheet improvement.

Secondly, senior debt is mentioned as principally asset based with limited supply of cash flow loans. Therefore it is difficult for the buyout funds to raise the necessary leverage capital for individual deals.

The result is, one, valuations relative to EBITDA, which is how we look at it, have declined. As a point of reference we have seen trailing market deal multiples for companies with enterprise value of less than $50 million decline from a high of around 10.4 times in the third quarter of 2008 to around 6.5 times of EBITDA in this quarter ending in December 2009.

Secondly, the private equity firms as we mentioned before continue to have to invest a large amount of equity relative to their capital structure. And finally, the opportunity for mezzanine and equity co-investment has grown to therefore for fill this gap between the senior lenders and the equity investors.

How does this affect our pipeline? Well, these factors are to our advantage as valuations are more reasonable, overall leverages lower and there is greater demand for the junior or mezzanine debt. We are experiencing an increase in the flow of both the quality and number of new opportunities for mezzanine and equity co-investment. And while we continue to worry about the economy we will be diligent in our pursuit of new investments and that may limit portfolio growth, though we do have to make a few new investments in the next two quarters.

As to our outlook, the goal continues to be the maintenance and consistency of our distributions to shareholders while achieving solid growth in the portfolio of proprietary investments in this lower middle market buyout section that we compete in. And David, that concludes my part of this presentation.

Thank you for that great report. Where excited about the future. Now let me introduce our new CFO, David Watson. He's received a lot of help from one person, Lewis Parrish. And Lewis has been instrumental in bringing this financing, this reporting for financing to where it is today. David Watson came on a couple of weeks ago in baptism by fire, if you will, coming on right at the time of our report. But let's turn it over now to David Watson. Go ahead.

Thank you David. We'll begin with our balance sheet. At the end of the December quarter we had approximately $278 million in assets consisting of $187 million in investments at fair value and $91 million in cash and other assets. Included in the cash and cash equivalents is approximately $85 million of U.S. Treasury Securities which we purchased through the use of borrowed funds on our line of credit and a $75 million short term loan at quarter end to satisfy our asset diversification requirements for regulated investment company status.

Immediately after the quarter end we sold those same securities, repaid the short term loan and read paid our line of credit of the borrowed funds used in this transaction. Therefore at the December quarter end we had about $27 million borrowed on the line of credit, $75 million borrowed via the short term line and had about $175 million in net assets. So we were less than one to one leveraged on our senior secured borrowings.

We had a net asset value of $7.93 per share. This is [partly] related to the depreciation of the aggregate investment portfolio over time. Currently, we have approximately $187 million in investments at fair value, cash of approximately $2.1 making and $15 million outstanding on our line of credit. We believe this to be a safe balance sheet for company like ours and we believe our overall risk profile is low.

Regarding our income statement for the December quarter end, total investment income was approximately $5.9 million versus $7 million in the prior-year quarter, while total expenses including credits were approximately $2.8 million versus $3.4 million in the prior-year quarter. Leaving net investment income which is before depreciation, depreciation gains or losses, of approximately $3.1 million versus $3.6 million for the quarter last year, a decrease of about 14%.

For the nine months ended December 31, total investment income was approximately $16 million versus $19.8 million in the prior-year period while total expenses including credits were approximately $8.1 million versus $9.4 million in the prior-year period, leaving net investment income of approximately $7.9 million versus $10.4 million for the prior-year quarter, a decrease of about 24%.

The primary driver of the current income versus the prior year's income, both for the three and nine-month periods ended December 31, was due to the loss of income related to our previously held senior syndicated loans, the majority of which were sold during the first quarter to repay our old credit facility to Deutsche Bank. We did have a lower interest expense to offset some of the loss in income from the loans we sold, but not that much because the rate of interest on our new line of credit was much higher.

Let's turn to realized and unrealized gains and losses. This is a mixture of appreciation, depreciation [and actual] gains and losses on our investments. Said another way, net realized gains and losses are from cash due to sales or disposal of investments.

Net unrealized depreciation is recognized in our statement of operations of non-cash accounting from the change in fair value [in] the portfolio during the quarter. For this December quarter end we recorded realized losses of $1.3 million from the sale of one senior syndicated loan and a portion of another. Through the sales of these loans which had an aggregate cost basis of approximately $6.8 million, we received $5.5 million in net cash proceeds.

For the December quarter end we had net unrealized depreciation of approximately $6.2 million over our entire portfolio. This was driven by approximately $8.2 million of unrealized depreciation from the equity component in our control investments. As multiples come down on the prices paid for companies, we have to use a lower multiple to value our portfolio and it had an impact on our portfolio valuation. This is non-cash and comes from the value placed on the portfolio.

Although our aggregate investment portfolio has depreciated, our entire portfolio was fair valued at 83% of costs as of December 31 2009. 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.

One note on our valuation process, we have continued to use market bid prices for our remaining syndicated loans in our portfolio at December 31, 2009. The syndicated loans comprise approximately 3% of the fair value of our investment portfolio.

Now let's turn to net decrease and 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 fully diluted common shares when we use per share numbers.

For the December quarter end this number was a decrease of about $4.4 million or $0.20 per share versus $3.9 million or $0.18 per share in the prior year's December quarter. A year-over-year changes primarily due to the loss of income related to the number of syndicated investments held at December 31, lower interest expense and larger net unrealized depreciation from our investment portfolio. 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 expect continued volatility in the aggregate value of the portfolio.

Our average loan ratings for the quarter remained relatively unchanged. The risk rating system we use that are originated loan at an average of 5.8 for the quarter, which is up slightly from the September 30 quarter. The risk rating for unrated syndicated loans was an average of 6 for this quarter, a decrease from the average of 7 from the September 30 quarter.

Our risk rating system gives investors a probability of default rating for the portfolio with a scale of zero to 10 with 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 [B, B2] in the quarter ended December 31, unchanged from last quarter end.

Historically, we had concentrations of variable late rate loans in the syndicated markets but we have sold all but two syndicated loans. Some of our buyout loans have variable rates, but we almost always have a minimum or floor in the rate charge so that if interest rates declined it will minimize impact on our ability to make distributions. And we've repurchased an interest rate cap on $45 million of debt on our new credit facility in order to have some protection on our cost of funding if interest rates rise.

We have about $150 million at cost in fixed-rate loans for rates with a fixed floor, all in our buyout deals. In other words, approximately 83% of our investment at fair value have a floor or are fixed. They are also at relatively high rates, so we should be okay there.

We have adopted the Statement of Financial Accounting Standards Number 159, the fair value option for financial assets and liabilities, which is also now known as ASC 825 under the new accounting standards notification rules for our credit facility. ASC 825 requires that the company apply a fair value methodology to the credit facility.

For this quarter the credit facility has been fair valued by an independent third-party at $26.9 million, and unrealized appreciation of $45,000 has been recorded three months ended December 31, 2009. Since this is depreciation of our debt, it means that the net worth of the fund went up by $45,000. Please note that for the nine months ended we are still in a net unrealized appreciation position of $133,000. We would like the fair value of the assets and the liabilities of our balance sheet to give full disclosure to our shareholders.

As of December 31, 2009, we do not have any loans with paid in kind income or original issue discount income. PIK income would result in recording non-cash income from which we would have to distribute out to our shareholders under tax rules. In essence, we would have to borrow money to make a distribution to our shareholders because we did not receive any cash from our PIK income. We avoid being in an unsustainable situation that could result from PIK income.

Currently all of our portfolio companies are paying on time and as agreed with the exception of one proprietary loan, ASH Holdings Corp, our bus company in Phoenix. This concludes my presentation.

All right, thank you very much David and thanks to you and Louis for the work that you did this quarter. That was a good summary of the financials and I do hope each of the listeners will read our press releases and also obtain a copy of our quarterly report called the 10-Q which was filed with the SEC yesterday. You can find that on our website at www.GladstoneInvestments.com and you can also find it on the SEC website.

I guess the big news this quarter and also after the quarter end was that we've recovered from the difficulties caused by Deutsche Bank. In order to pay them off we had to sell a lot of our performing loans and this caused us to have less income and reduce our dividend. But, and because the market place -- the loans were so low at the time we had to sell, we had to sell the performing syndicated loans at steep discounts and that caused us to have a loss and reduced our net asset value.

This is a very disturbing time. We are happy with our lenders BB&T and KeyBanc. Both said they would help us -- would lend us some money to help us pay down the loan. And we needed to pay off Deutsche Bank, which finally we got that behind us.

We do have good relationship with them. I think it will help us build our business. But now that the Deutsche Bank problem is behind us and we are rebuilding our line of credit by talking to other lenders, I think things are looking good for us to find ways to grow our asset base again.

We are working with BB&T as the lead bank to extend our line of credit. It does come due in April of this year. And while it is not completed, it is not a completed deal, we do expect to have this renewed. After all we only owe the $15 million at this point in time.

At this time, we're also looking for long-term debt. We're working with some of the insurance companies and hope we can get some credit there. We need some long-term credit on the balance sheet. We are getting to know this area much better than before and expect to have some success in 2010. That's all I can say at this point is stay tuned and hopefully we'll have some announcements as the year goes on.

We continue to worry about the cost of things, especially oil, because we believe it will go up again as the economy becomes stronger. The United States is much too dependent on foreign oil. We need to increase our domestic use of other energy sources such as coal, natural gas, and nuclear.

Trade deficit with China continues to worry us. Other countries -- I mean at the end of the day China subsidizes their companies and their country and they sell the products to us under the free-trade agreement. In essence, China has destroyed thousands of businesses in the United States and caused the loss of many jobs. And it is so difficult to watch these US jobs get sent to China and other Asian nations and now China is not even buying our debt. They stopped buying our debt and I guess at this point in time we'll end up having some kind of trade war with them and try to get our jobs back.

We're worried about inflation. This comes from printing so many Treasury bills. In the last eight years the government sold about $5 billion of Treasury bills. In 2009 and 2010 they're projecting to sell about $2 trillion of T-bills. Folks, inflation is coming and the dollar will decline in value and this is going to hurt a lot of people that are on fixed income. After all, we still import a major amount of all of our products and services and the dollar's devaluation will hurt all of that in terms of buying power.

The amount of money being spent on the wars in Iraq and Afghanistan is also hurting. We think the soldiers that are fighting these wars for us are just wonderful. We support our troops and all they do for us. After all, they lay down their life for us. They are the true heroes at this time. However, the war is draining our economy and we hope it ends soon.

Even worse than all of the things I've been talking about is the pork barrel spending in our federal government. I believe they're acting irresponsibly. The government is spending trillions of dollars on wasteful projects. The so-called stimulus package that has come out has just been filled with projects that don't create a single job. They just benefit someone in a state or locality that is represented in Congress.

State and local governments on the other hand are still in shock. All of their tax income is down dramatically. They're not spending like they did before and my guess is about 40 states are having severe budget problems, and we may have a couple of states that actually take bankruptcy as a way to solve their problem.

Of all the money being spent very little of that money is being aimed at small businesses and this is a tremendous, tremendous mistake. Small businesses create about 80% of all the new jobs and the spending that is going on is missing the opportunity to stimulate small businesses.

The Congress say that they're going to help small businesses but they almost never do. We really do need term limits on congressmen and congresswomen so we can get a new team in the Congress and hopefully start creating some jobs. Stimulus bill they passed will probably not create a single long-term job. It's just propping up the old worn-out businesses that are out there and we really do need big change in Congress.

In other ways, the US economy continues to remain viable as long as businesses are not related to housing or autos or financial institutions, then that business is avoiding the traumas endured by those industries. But all the industries have suffered due to the bad acts of a few. Even though the entrepreneurs and many small business owners and other savvy managers have kept their costs low, they still suffered a decline in sales.

We all know there is a terrible slowdown in the economy and we're seeing it in our portfolio of companies as well as the businesses that have shown up on our doorstep looking for financing. All of them have the same problem. Their backlogs are way down and their sales are way down and they have had to cut costs in order to keep their profits up.

It will take some time to get through this difficult recession. I remember the one in 1990. It took about three years to work our way through it. We are very lucky that so many of our portfolio companies are still doing well. It's a testament to their tenacity and strength. And I could just tell you a good entrepreneur is worth 100 bureaucrats telling people what to do.

Employment is worse than we had ever forecast. We never imagined it was going to be this bad. And while the government is reporting that the percentage of out of work people is going down, the government is really not counting so many people that have given up, that are not even trying to find jobs now. And they are certainly not counting the part-time workers who would like to work full-time and those in jobs of lesser income that would like to move up. I think the figure is more like 15% unemployment.

I do think we are near the bottom. We're starting to feel like this is the end of the recession and that time has come for us to move back up. It may take another six months or so to reach bottom, but we are near the bottom now and this is an excellent time to buy into good stocks and good companies and that's what we're trying to do. I think your company and our company will do fine in the future, especially in the near future.

Our distribution declared by our Board of Directors in January was $0.04 per month per share. That's for January, February and March. This is a run rate of $0.48 per year. Our banks are requiring us not to pay out more than our earnings in order to preserve capital. So now we obviously have got to get busy and continue to grow the assets in order to get the distributions back up.

At this distribution rate and with a stock price at about $4.92 yesterday, the yield is extremely high. It's between 9 and 10%, almost 10%. We don't have any plan to reduce the distributions. We're in good shape to continue our distributions and I think all of you can take solace in the fact that we are at the bottom and we're building from this position. This certainly means that the buyers of stock today are getting a fabulous return, and as all of you know, I continue to do dividend reinvestment of my shares.

Please go to our website and sign up for e-mail notifications. We don't send out junk mail, just news about your company. That's www.GladstoneInvestments.com is the site and you'll see the section that says click on the area that you want to put in your e-mail so that you can get the notifications.

In summary, as far as we can see the rest of the calendar year, 2010 looks certainly much better than 2009. But folks we can only see a couple of quarters out, so we want to be careful. We are after all stewards of your money. I think the worst is behind us and we can look now to begin building. We're out looking for new transactions to put on the books and I think we'll find a couple and hopefully have some good announcements for you.

Now, if the operator will come back on we'll have some questions from the analysts and our shareholders and do our best to answer them.

(Operator Instructions) Vernon Plack, BB&T Capital Markets.

Thanks very much. David I'm not sure if I missed this but could you talk a little bit about asset quality? I didn't see -- haven't had a chance to look at the quarter. Were there any additions to accruals or removal of non-accruals?

No, we pretty much remain the same. Our one problem deal is the bus company and we're working with [PMC], who is the senior lender there, and I'm hopeful we'll have some good results this quarter on that one but everything remains the same.

Okay, thank you.

Jon Arfstrom, RBC Capital Markets.

Couple of questions for you. You talked a little bit about trying to get some longer-term debt in place for the company and I know you are still maybe in negotiation or exploratory stages, but what's possible in terms of the term you could possibly get for something like that?

I can only speak in general terms because we don't have a commitment from anyone. But generally speaking we're hearing people talk about single digits and I'm reading that to mean somewhere between 7 and 8% long-term. Three years would be what we would expect but we might get up to five years. I know some of the larger business development companies have been able to develop some long-term lending, but we're a little bit smaller and it will take a while for the insurance companies to get around to us.

But we are talking to them very actively. We have engaged some folks to work with the insurance companies that we've been in contact with. I'm hopeful that this year we'll have an announcement on some long-term debt and be able to continue the growth in assets.

Okay, that's fair. And then just a question on your comments on inflation. It's probably the number one fear of most investors. And just curious how you approach running your business in terms of how you invest in how you manage the company with some of these concerns on the horizon.

In this company we are in relatively good shape because we have some fixed rate loans and they're very high. So we couldn't expect these companies to pay much more than that anyway. So we're in good shape there.

We bought the ability to get money in, in case interest rates go up with our coverage through BB&T. So hopefully that would protect us from there. The variable rate loans that we have all have floors. And that works a little bit against you in this situation because as interest rates come up we are already protected by the floor, so we really don't move up and that will cut into us a little bit. The floors are pretty high, so as a result interest rates would have to go very high to kick that in.

Now if they do go at that rate we will participate as rates go higher. But, it is -- the difficulty here is that any debt instrument is going to have some kind of problem with it during an inflationary period. For us the good news here is that the company that we have should be able to pass on any kind of increase in cost and as a result the equity should become more valuable over time.

As equity becomes more valuable obviously the net asset value and the strength in this company will become stronger as well. So the only protection here is for our use of variable rate loans with floors and we've got large equity positions that should sustain us through an inflationary period.

Okay, thanks for the color David. Good luck with all of the snow.

David West, Davenport & Co.

I'm just curious; it's encouraging to hear your thoughts that you may be able to try to pursue some new investment opportunities over the next several quarters. I know you've worked awfully hard to reduce your leverage. Could you kind of frame in dollar terms maybe the amount of new investments you would be comfortable making over the next quarter or two?

I think we can invest another $15 million, $20 million. We're working with our line of credit now, and assuming that we make some kind of announcement in the near-term that we'll renew that hopefully for a little longer than one year, that we'll be able to put $15 million or so in new deals. We are talking with other people that would join the line of credit, so we might have another partner commented that line of credit and push it up.

But ultimately, David, we really need long-term debt and we can't raise equity at this low price, but we need long-term debt in order to make this work. We have been looking at some variation on preferred stock. It's a little too expensive now, but we treat that just like debt. So whether we could get long-term preferred stock or long-term debt at a lower coupon, both of those work the same for us. So we are looking at both of those and I'm hopeful will strike gold with one of those and at some point in time have an announcement and have long-term debt that we can invest and continue to grow the assets.

But I would say until we make some announcement along those lines we're probably stuck at $15 million or $20 million until we -- again, this all depends on whether we sell one or two of the companies and reinvest the money and the capital gains that we get. So a lot of activity going on at this point in time and all of it much too up in the air for me to give more than that as details to it.

And to confirm, you said your current borrowings on the line of credit are around $15 million at this point in time?

That's right about $15 million.

Lastly any comment on the potential of A. Stucki to do further preferred dividends in the future?

They're running at a good rate and so are others that are making good money. We would hope that we would be able to take a dividend out of some of those companies over the next year.

Thank you very much.

(Operator Instructions) John Rogers, Janney Montgomery Scott.

If I look at the cost portfolio it looked like the valuation on preferred stock fell for several of the companies. I was wondering is this a trend? Is this indicative of how -- the valuation multiples on these companies, or are fundamentals are weakening?

What happens in the market place, we value our equity based on multiples that we get from some services that tell us what the multiples are going on in the market place. As those multiples come down, we have to mark down the equity in preferred stock in these companies. So over time, even though we would not want to sell and don't plan to sell any of these companies at those multiples, the evidence is that we have to mark them down because the multiples have come down. So our goal over time is to watch these multiples and hopefully make some sense out of them because they are coming down to a very low level.

Our problem, and we have to work with this, is that we bought some of these companies and bought into some of these companies at 4.5, 5.5 times EBITDA. The multiples at the time people were paying were 8, 9 and 10 times. So as a result, as those heated multiples come down to something more normal, we're having to bring our 4 and 5 multiple down to 3 and 4 times which is probably unrealistic. But at the same time that is the methodology that we've selected to use.

And I think all of these valuations are just high priced guesses at what the value of these companies are. If we sell one of these then it comes in at a higher number than the multiples, you will know how conservative we are. As you know we have one of our companies that is in detailed discussions with folks about perhaps being sold and we'll see what that multiple looks like.

Okay, great. So the fundamentals would you say are stable? You were saying you are seeing pockets stabilization.

That's right. In terms of fundamentals, we mean day-to-day operations at these businesses, which means they are getting sales in. They're seen a few upticks in sales. They're not seen the steep decrease in sales and backlog that they saw during 2009. They're seen some stability in their day-to-day operations.

Okay great. Valuation on Noble Logistics. It fell a little for the debt. Could you talk a little bit about what is going on there?

We struggle with that one from the standpoint of how to value it. It has gone through some interesting times in that some of its delivery has been to the automotive dealerships and we've seen a sharp decrease in some of the dealerships. Their other part of their business has been strong and continued on and I think the dealerships will come back. But at this point in time we were struggling to figure out what would be a decent valuation for them and just had to take a very conservative approach to it.

If the dealers don't come back, how do you look at the current cash flow? Is it sufficient to continue to service your debt?

Yes. We're servicing the debt and I think the company would survive. It wouldn't survive if every single dealership went away, but nobody expects that. They're into some of the stronger dealers and we expect that to continue.

Last question, it's a small item but your senior subordinated term debt for ASH actually improved, the valuation improved versus last quarter. I know you're in talks with the senior lender there. Could you talk a little bit about how that is progressing and where you think that might shakeout?

My guess is that they will continue to be what they are today and they're -- will be strong and continue to make the payments they're making. My guess is that over the next year the company will get stronger, simply because at some point in time these school districts have to buy buses and they'll get shipments of buses. They're up this year versus the prior year. I don't know what they'll be for 2010.

My guess is they'll be up again because these buses wear out and they have to buy new buses. And at some point in time they'll have to get the money from someplace in order to continue to maintain their bus routes. So from my perspective, and this again is just a guess, I think the company will be better in 2010 than it was in 2009 and certainly better than 2008.

This is Dave Dullum. Just to add, they've gone through a major, for the right reasons, expense reduction which really kicked in on a full run rate near the end of last year. So what we're going to have is a benefit of that in 2010, so essentially the EBITDA run rate is frankly significantly better than where it was near the end of last year and for all of last year. So as David said I think we are seen definitely more stability here and continue to work that to try to get back on a current pay basis.

Obviously municipalities are hurting. Do they benefit from stimulus dollars? I've no idea. But is there any --?

Not really; unfortunately where they are in the school districts they are in, in Nevada, we haven't seen it. Maybe some green, by the way, we're seeing some interesting things going on there and that has actually had a little bit of an assist with some of their products and some of their capabilities that they have.

Do we have any more questions?

No sir. It appears we have no further questions at this time.

All right. Well, we appreciate all of you calling in and if you have questions you can always e-mail them in. We will try to answer them as long as they are not major questions. If you send in something that we think we've missed, we'll put it on our Q&A section so you should check in and take a look at that from time to time.

With that, that ends this. Operator, if you will come in and close it up that will be great.

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