Gladstone Investment Corp (GAIN) 2010 Q3 法說會逐字稿

Good morning and welcome to the third quarter ended December 31, 2010, shareholders' conference call for Gladstone Investments.

All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. David Gladstone. Please go ahead.

All right. Thank you, Amy, for that nice introduction and hello and good morning to all of you. This is 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 always glad to talk to shareholders and would like to see some of you come by if you are in the Washington DC area. We are here in McLean Virginia, a suburb of Washington, so please stop by and say hello. You will see a great team at work. I think they are the best team in the business.

And now I need to read a statement about forward-looking statements. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the Company.

These forward-looking statements inherently involve certain risk and uncertainties, even though they are based on our current plans. We believe these 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 caption, quote, Risk Factors, end quote, in our periodic filings with the Securities and Exchange Commission. They can be found on our website at WWW.GladstoneInvestment.com and also on the SEC website.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of information, future events, or otherwise.

First up to talk to us today is Dave Dullum. He is President of the Company. He will provide a lot of information about this fund. So, Dave, take it away.

Thank you, David, and good morning all. To review briefly, Gladstone Investment provides capital for buyout transactions of lower middle-market businesses. We partner with the management teams and private equity sponsors with our investment helping to achieve the necessary leverage, investment (technical difficulty) these transactions.

We also seek opportunities to provide capital in support of owners and management teams who may wish to achieve partial liquidity by selling a portion of their business or perhaps dividend recaps. Our primary investment vehicle is subordinated debt, which we combine with an investment in preferred stock or common stock, and sometimes may include warrants to buy common stock.

This approach allows us to focus on generating income from the interest received on the debt portion of the investment, which we are then able to use for dividend distributions to our shareholders on a current basis and the opportunity then for future capital gains on the equity portion of the investment. Currently, the environment is favorable and we will talk more about this for our type of financing and we are seeing new deal activity increase.

In terms of the actual fund activity, I am pleased to report that the quarter ended on December 31, 2010, was quite active in that we made two new buyout investments and exited one of our buyout portfolio companies. The first investment, which occurred at the end of October, was in a buyout of a company called Venyu Solutions. It's a company that provides disaster backup and data recovery along with a managed hosting business for lower middle-market enterprises.

This investment was with Venyu's management team and we provided a combination of $19 million in subordinated debt and $6 million in preferred stock, which supplemented management's equity contribution.

The second investment, which occurred at the end of December, was also in a buyout and this one in a custom injection molder called Precision Southeast Industries, where we invested $8.2 million in subordinated debt and $2 million in preferred stock alongside Precision Southeast's management team.

In December, we also exited one of our portfolio companies called Chase Doors. We received about $40.8 million, which included the full payout of the original investment of subordinated debt and also a significant capital gain on the equity, which equated to approximately a total annual return on our investment of about 16.2%, pretty good return for that investment.

This transaction, along with the exit of A. Stucki, which we had reported in prior quarter, is indicative of our plan and the goals to achieve a combination of current income from the debt investments that we make and capital gains from the equity portion of those investments in the portfolio.

As a result of these activities, in the quarter we invested a total of approximately $28 million in debt and $8 million in equity in new portfolio companies and received about $21 million in debt repayment and $13.5 million for equity proceeds and capital gains. At the end of the December quarter, we had approximately $190 million invested in buyouts at cost and $5.9 million invested in syndicated and one non-syndicated loan for a total portfolio cost of approximately $196 million and total assets of approximately $278 million.

Regarding the portfolio company in general, our companies are performing well and we are seeing improvement in spite of the current economic environment. We continue the portfolio management activity, which is one of our strengths and an important part of our investment management approach of working to limit losses and preserve cash flow from our portfolio companies.

The portfolio management team continues to provide value-added services, such as profit improvement initiatives and business planning with the portfolio company, operating management support to the portfolio companies, and also facilitating interaction between the portfolio company management teams for exchange of ideas such as best practices in purchasing, pricing, and manufacturing disciplines.

Turning to the marketplace, which is important, obviously, for new investments, our investing opportunities in our market space we believe continue to improve in quality and quantity, although the economic conditions still create uncertainty around earnings and cash flow of the lower middle-market companies. However, those companies that have been well managed and come through the downturn, thereby proving their resiliency, are now contributing in great part to the increased activity in the buyouts in general.

In addition, we are seeing greater availability of senior secured loans and some appetite for senior cash flow loans from the banks. These factors, along with the need for the private equity buyout funds to put money to work, are resulting in increased deal flow. And while these buyout funds are providing around 40% to 50% of the capital structure necessary in these transactions, they still need the subordinated debt and equity co-investment, which we provide, thereby increasing the demand for our type of financing.

As far as new deals, at around the midpoint of 2010, we began to turn our attention to increased marketing and new deal generation. We are continuing this focus and as a result, we are experiencing an increase in the flow of both the quality and number of opportunities for our type of financing.

As I previously mentioned, we did close two new buyout transactions in the December quarter and our pipeline of prospects where we have issued indication of interest letters continues to expand. These indication letters are the beginning of our review process on new investment activity. We continue to be cautious about the economy and will be diligent in our pursuit of new investments.

We also have very good capacity for new investments resulting from the funding availability of our two-year line of credit, which we have previously mentioned, and also the cash receipts from the exits of A. Stucki and Chase Doors, also as previously mentioned.

And so our outlook, our goal for this fund is to maximize and grow our monthly distributions to shareholders while achieving solid growth in the portfolio of proprietary investments in the lower middle-market buyout market space. We are very excited about where we are positioned these days and look forward to, we believe, a very good opportunity for the next year or two.

Thanks, Dave, and this concludes my part in the presentation. I will turn it back to you.

All right, thank you. That was a great report, Dave, and we are certainly excited about the future of this fund. But now let's hear from our CFO, David Watson, on the fund's financial performance for this quarter. David?

Thank you, David, and good morning, everyone. Before I go through the financial statements, I would like to highlight several key points for this quarter end.

First, just like the A. Stucki sale in the first quarter, the Chase Doors sale was a great exit and equity investment success which highlights our investment strategy, achieving returns through current income from debt investments and capital gains from equity co-investments. Second, we closed on two new proprietary buyout deals during the quarter totaling $35.2 million, which are our first such new investments since November of 2008.

Third, we believe our portfolio is performing well. This is reflected in the net increase in unrealized appreciation, excluding reversals to the realized gains, during the quarter of $5.5 million. The good performance is also reflected in that all but one of our portfolio companies are current with interest and principal payments.

Fourth, at the time of this call, we have nothing borrowed on our line of credit and we have about $42 million in cash on the balance sheet. And lastly, net investment income increased 147% over the prior-year quarter, primarily due to income recognized related to our Chase Doors sale and it's on target to cover 100% of our dividends.

Now for the details and I will start with the balance sheet. At the end of the December quarter, we had $278 million in assets consisting of $151 million in investments at fair value and $127 million in cash and other assets. Included in the cash and cash equivalents is $75 million of US Treasury securities through the use of borrowed funds at quarter end to satisfy our asset diversification requirements.

Excluding that $75 million, we had $52 million in cash and other assets, which primarily consisted of $40 million in cash due from custodian which was received subsequent to quarter end. Therefore, at the December quarter end we had $67.4 million borrowed via the short-term loan, $8 million borrowed on the line of credit, and we had $199 million in net assets. So we were less than 1-to-1 leverage on our senior secured borrowings.

We had a net asset value, or NAV, of $9 per share. Currently, we have $151 million in investments at fair value, cash and short-term securities of $42 million, and no outstanding borrowings. So we believe this to be an extremely safe balance sheet for a company like ours and we believe our overall current risk profile is low.

Moving over to the income statement, for the December quarter end total investment income was $10.7 million versus $5.9 million in the prior-year quarter while total expenses, including credits, were $3.1 million versus $2.8 million in the prior-year quarter leaving net investment income, which is before appreciation, depreciation, realized gains, or losses, up $7.5 million versus $3.1 million for the quarter last year, an increase of 147%. This is primarily due to additional other income in the form of dividends and success fees resulting from the sale of Chase Doors during the current quarter, partially offset by reduced interest income due to a smaller portfolio and an increase in the incentive fee expense by $1.3 million over the prior-year quarter.

Let's turn to realized and unrealized changes in our assets. Realize gains and losses come from actual sales or disposals of investments. Unrealized appreciation and depreciation come from our requirement to mark our investments to fair value on our balance sheet, the change in fair value from one period to the next getting recognized in our income statement. Unrealized appreciation and depreciation is a non-cash event.

For the December 2010 quarter end, we had a realized gain of $6.9 million related to our aforementioned Chase Doors sale. For the December 2009 quarter end there were $1.3 million in realized losses related to the sale of two syndicated loans. So from an unrealized standpoint, during the December 2010 quarter end, we had net unrealized appreciation of $1 million over our entire portfolio, which included the reversal of $4.5 million in unrealized appreciation related to the Chase Doors exit.

Excluding reversals, we had $5.5 million in unrealized appreciation for the current quarter. The remaining net appreciation was primarily due to increased multiples and, to a lesser extent, performance at our portfolio companies.

Our entire portfolio was fair valued at 77.1% of cost as of December 31, 2010. The cumulative 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.

Let's turn to net increase, 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.

For the December 2010 quarter end, this number was an increase of $15.1 million or $0.69 per share versus a decrease of $4.4 million or $0.20 per share in the prior year's December quarter. The year-over-year change is primarily due to $7.5 million in unrealized appreciation and realized gains recorded in the current year quarter compared to $7.5 million in unrealized depreciation and realized losses recorded in the quarter ended December 31, 2009.

While we believe our overall investment portfolio is stable as demonstrated by cumulative net gains over the past four quarters, it 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.

Regarding our loan ratings, the risk rating system we use is that our proprietary loans, which represent over 96% of our portfolio, at a weighted average of 5.8 for this quarter, which is down from 6.6 during the prior quarter. As many of you know, we changed our risk rating system and the new system is even more conservative than the prior one. That accounts for some of the downward movement.

Also, a removal of two highly-rated loans in A. Stucki and Chase Doors from the system resulted in a lower rating. Our risk rating system gives investors a probability default rating for the portfolio with a scale of zero to 10 with zero representing a high probability of default.

Historically, we had concentrations of variable-rate loans in the syndicated markets, but we have sold (inaudible) all but a couple 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 decline further it will minimize the impact on our ability to make distributions.

We have $135 million [cat] cost in fixed-rate loans, or rates with a fixed floor, all in our buyout deals. In other words, 98% of our debt investments at cost have a floor or are fixed and they are also at relatively high rates. In addition, we purchased an interest rate cap on $45 million of the debt on our credit facility in order to have some protection on our cost of funding if interest rates rise over the next two years.

As of December 31, 2010, we had one loan representing less than 1% of the fair value of our investment portfolio with paid-in-kind income. PIK income, of which we recorded $7,000 during the current quarter, results in recording non-cash income from which we have to distribute out to our stockholders under tax rules. We believe the amount of our PIK income is extremely minimal.

And regarding our portfolio companies performance, all are paying current except for ASH, which remains on non-accrual this quarter.

On a final note, I wanted to touch on our distributions. You may have noticed that for the nine months ended December 31, 2010, we have had net investment income of $14.2 million and have only distributed out $7.9 million during that same period. This major difference can be attributed to the difference in our book and tax income.

Please keep in mind that distributions are based off of taxable ordinary income for regulated investment companies, which are generally required to distribute at least 90% of it in any given fiscal year.

For tax purposes, success fee income, for which we have had in excess of $5 million in the current fiscal year, is treated as a capital gain and we have not been required to distribute out our capital gains due to the significant amount of prior period realized losses that we incurred when Deutsche Bank forced us to sell most of our syndicated loans in 2009 at a loss. This being said, we continue to strive to increase our income-generating assets, to increase our recurring income, and to increase our distributions to our stockholders.

With that, we look forward to maintaining momentum in our last quarter of fiscal year March 2011 and into fiscal year March 2012. And now I will turn the call back over to David.

Thanks, David Watson. That was a good report and that is a good summary of all of our financials. I hope each of the listeners will read our press release and also obtain a copy of the quarterly 10-Q that we just filed with the SEC that can be found on our website at www.GladstonInvestment.com and also on the SEC website.

I guess the really big news this quarter is the sale of one of our very good investments at a strong profit. If you will remember, Chase Doors, that again validates our concept of the fund as a buyout fund. This was our second sale in less than a year and the sale last summer of A. Stucki -- we had loaned them $36 million at an average of about 12% interest, nice loan that we had there, but we also invested $4.5 million in equity and got back $21.9 million. So that was a great return and a great capital gain as David Watson mentioned.

In this December transaction, in the case of Chase Doors, we loaned them about $27 million at an average of about 13.7% interest, so a good loan there, and we invested $7 million in equity and got back $17.9 million, another good investment. These gains are replacing the losses that we had in 2009 when Deutsche Bank wouldn't renew our line of credit and we had to sell off our assets at a loss in order to pay back Deutsche Bank.

I just recently, by the way, found out that the Federal Reserve had purchased $280 billion worth of loans at par from Deutsche Bank in order to bail them out during that same period of time. And during that same period of time Deutsche Bank was refusing to extend our line, so we had to sell our loans at below cost in order to pay them off. Again, your government at work.

By the way, this company is getting much stronger now. We are almost to the point of having gotten back all of the money that we lost due to that sell-off. Also in addition, these new loans that they are putting on the books, you should see more transactions like that as the year goes on.

We have a nice line of credit with BB&T and room to borrow under that line of credit, and we have cash to invest. I know Dave Dullum and his team are working night and day to find good new investments for this fund and I think they will be very successful during the coming year.

As we redeploy our cash, and we hope to see much more income in the way -- in this fund, and that will be in the short-term, but also long term the profits should come forward in terms of our equity investments. And while we can't make any promises or any guarantees that the future will be anything like we have just experienced in the past year, we think this fund is in a fabulous position and has a great opportunity.

And just so you know, I know I have been asked by some of the shareholders why I am not buying stock. I just want to say that we are filing some forms -- last year through the fund's dividend reinvestment plan I purchased another 12,153 shares and I keep doing that every month, every time there is a dividend. So in terms of value, that was about $85,000 worth of purchases.

There are plenty to worry about in the economy these days. Some of the things that we worry about, of course, is the cost of oil. It has just ballooned up because of all the problems in the Middle East and certainly all of our companies and all of our economy runs on oil. This -- coming out of recession we know oil will go back up again as people start to use more and more of it.

The United States is much too dependent on foreign oil. We need to increase our use of domestic energy sources, such as oil of course that we have here, but we have lots of coal. We have a tremendous amount of natural gas and we have all the technology for nuclear that we could generate plenty of energy from.

We worry about the trade deficit with China and other countries. They are draining our economy too. China subsidizes their businesses pretty extensively and they sell the products, of course, under the Free Trade Agreements back to us.

China has destroyed tens of thousands of businesses in the United States and caused losses of many, many jobs. It's so difficult to watch these jobs disappeared to China and to other countries that have subsidized their businesses that have deplorable labor conditions and extreme pollution.

All of those companies in China would have to shut down today if they had to obey the labor laws and pollution laws that we have here in the United States. I know our people can compete very successfully with the Chinese and others if the playing field were level. We just need our government to get behind our businesses now.

We are now worried about inflation, but that comes so much from the government printing so many T-bills. We are worried that the dollar will have a big depreciation over the next 18 months because of the federal government is printing so much money. Our government, obviously, is in the process of devaluating the dollar because of the amount of money that they are printing.

And we also worry about the amount of money being spent in Iraq and Afghanistan. It's certainly hurting our economy and that is not to take anything away from our soldiers. They are doing a wonderful job there. We support them 100%.

We don't want anything, any spending cuts that would in any way endanger our troops. They risk their life every day for us; they are the true heroes and we owe them a lot. However, you have to admit that the war is draining our economy and does hurt our recovery.

Even worse is the excess spending by the federal government. The government is still spending trillions of dollars on wasteful projects. These so-called stimulus projects are filled with projects that have very little impact on job creation.

The only good news these days is that state and local governments are still in shock about their tax income being down so much, so they are not spending like they did before. By last count, about 40 states are having severe budget problems. We expect to see some towns and counties to go bankrupt. I am not sure that any of the states would go bankrupt but they certainly have their problems.

All of this money being spent, all of it, whether it's federal or state or whatever, is very little of it's going to small business. This is a huge mistake because small business creates 80% of the new jobs and this new spending is missing an opportunity to stimulate the small business area.

I know that Congress and certainly the president say they are going to help small businesses, but in my experience they almost never do. So we will have to see if this government lives up to its promises.

We really do need to see term limits on the Congress. We need to get a new team into the Congress and see if we can turn things around. The stimulus bill they have passed for the most part will not create long-term employment. It's just propping up the existing worn out (inaudible) businesses.

In other ways the US economy is continuing to move along. It's getting stronger as long as businesses are not related to housing and autos and the financial institution area. Those businesses that are not related to that area have avoided the traumas that endure in those industries.

But all of the industries have suffered due to the bad acts of a few and, as far as I can see, there are very few people there were penalized from the damages they did. Many of the banks and investment banks and investment companies were bailed out by loans from the US taxpayers while the bad companies that were having all the problems had their stock drop dramatically. And when it did, the same managers were given generous amounts of low-priced stock options as rewards so that they could make a lot of money going forward. This seems to be the reverse of what should have happened.

We have noted before that the backlogs in our portfolio companies are much better this year than they were last year and I am very optimistic that this miserable economy that we have been going through is now turning up.

Employment is worse than we ever forecast, and while the government is reporting that the percentage of people out of work is going down, the government I think is not counting so many people that have given up and they are not even seeking jobs now. This government is certainly not counting the part-time workers that would like to be full-time. The figure for unemployment is probably more like 15% to 20%. We have a serious problem in that area that I hope the government will get behind and help solve.

While there are many out there that think the recession is over, there is still many aspects of the recession that continue today and are likely to continue for the next six months to a year. I believe we are on the way back but it's going to be a very slow recovery. There are many companies that are showing good results and I think our companies will do fine in the future. As you have heard the report, the portfolio is in really good shape these days.

Our distributions declared by the Board of Directors in January was $0.04 a month for January, February, and March. This is a run rate of $0.48 a year. The Board next meets in April to consider the dividends for the next quarter and I hope we can increase the dividend sometime within the next 12 months.

At this distribution rate, with the stock being at $7.07 as it was yesterday, the yield is extremely high. After all, this company has no debt, it has cash on its balance sheet, it's in a very solid position. We have no plans to reduce distributions and are looking for ways to increase it. I think buyers of the stock today are getting a fabulous return.

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

In summary, as far as I can see, the rest of the calendar year 2011 looks much better than 2010 but we only see a couple quarters out so we are stewards of your money. I think the worst is behind us. We now have a good base to build from. We are looking forward to putting a lot of new investments in the portfolio during the coming year.

Now with that, I will stop now, Amy, and if you will come on and we will go through the questions and answers.

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

Thanks very much. And a few questions; this may be best addressed to Dave Dullum.

Dave, on the -- I know that there is the potential for some pretty meaningful NAV accretion in the portfolio assuming valuation comes back on some of the companies. Probably the largest investment that that pertains to is Galaxy. You had a nice write-up this quarter. Just curious if you could give us a little more color on Galaxy.

Sure, Vernon. Galaxy is a manufacturer that supplies tools and dies basically to the small aircraft industry, and as you know that industry certainly was impacted pretty significantly in 2009.

What we are seeing there, and it's reflected obviously in the valuation you referred to, is clearly, as David mentioned, generally increase in the backlog. They have done a very good job in terms of the management as far as doing the -- making the reductions they had to make during the difficult time.

We are very actively involved with the business. We have very good management in there and we are just seeing generally nice uptick and increase, not only in the businesses that they supply prior to the downturn, but actually expanding their customer base to other customers beyond the two or three or four that were pretty significant customers of theirs.

So generally, overall, increasing in the industry that they are in and just good management and, therefore, I think one that we will hopefully see continued improvement in value and earnings.

Okay, and on the flipside I noticed with ASH that was written down another $2.3 million to essentially zero. I think they actually drew on their revolver a little bit during the quarter and just wanted to know what your thoughts there were on ASH.

Yes, ASH -- ASH is referred to it -- is a distributor of school buses in two very tough economies right now. One is Las Vegas and the other is in Phoenix. Their economies, their local economies, as you well know, have been significantly impacted.

So again, it's one of those, we put a lot of attention and time into it. We have got, again, very good management in there and we are just working through it. I think what is reflective of that valuation indeed is the fact that the economies there are lower than we would like them to be, and it's going to take probably the next year or so to see that turnaround.

But we have no panic on that investment. We feel, again, very good about what they are doing. It's a distributor of Thomas buses, which is a very good supplier. So again, just working through that problem and what you saw there in terms of valuation is reflective of the methodology we use and just the way the numbers worked out at that point in time.

Okay, thank you very much.

Vernon, just to add on to that. As you know, the economies of those two areas are very bad and what happens, of course, is the governments there their revenues went down dramatically and as a result they don't have as much money for the school budget. One of the things the school budget encompasses, of course, is buying new buses.

You can defer buying new buses for a while and at some point in time it becomes more expensive to keep the old buses and maintain them than it does to buy new buses. And that is where we are now. We are waiting for that point to turn and them to start buying new buses, because at some point they have to buy new buses.

Those are all long distances to drive those school buses so they take a lot of torture every day as they go in and out of long distances. So it's just a matter of time before the bus -- number of buses picks back up.

Okay, great, thanks very much.

Okay, next question.

David West, Davenport & Co.

Good morning. Was curious to see that you did add one small syndicated credit, the Fifth Third payment processing situation. Is that just kind of a one-off situation or do you think you might seek some other syndicated credits like that?

Well, that had to do with the fact that our line of credit requires us to have a certain number of entities in it and we were getting close before we closed these other deals, so we bought one on the open market. It's performing well. It's a nice investment. Don't look for any more to come on the portfolio.

Very good. And I guess this is somewhat related to that. Your asset diversification test, it seems like you are having to borrow a little less money as time goes on there and at quarter end. As you [go,] is there a dollar amount you feel like you need to invest as you are originating new credits to [lead] that test.

Yes, David, with the timing of the sale of Chase and the purchase of other investments, we conservatively purchased $75 million to make our asset diversification requirements as of 12/31/2010. Going forward, with cash being a qualified asset, and the more investments we put on our books that are qualified assets we expect to not have to purchase as much at each quarter end to meet our requirements.

Very good. And lastly, I very much appreciated that detail regarding the tax situation given your level of NII income year to date. Is there room in there, you think, potentially for a special dividend to the course of the year?

Hard to say at this point in time. Certainly fiscal year ending March 31 there won't be any special because we have already declared those dividends, but for fiscal year beginning in April 1 of this year, 2011, there is a chance you might get an increase in the dividend or a special dividend just based on our projections. Now again, very hard at this stage to determine what next year is going to be looking like, next year beginning April 1, 2011.

Thanks very much.

Next question.

Charles Redding, BB&T Capital.

Hi, David, many thanks. Just wondering if you guys had given additional consideration to obtaining your SBIC license. And if not, are there specific objections to the SBA requirements that would prevent you from receiving that?

In this company, we are not anticipating getting an SBIC license. We do buyouts here. Buyouts are not as favorably looked at by the folks at SBA because we end up controlling them, and so as a result this company probably will not get an SBIC license. In fact, I would say will not.

We are looking at some long-term debt from insurance companies. The insurance companies are back now. They are looking at financing. They hadn't looked for a long time at financing any financial institutions. Well, we have been in contact with a couple and they seem to be warming up to the idea of doing a transaction.

The problem for us has always been our small size and getting Standard & Poor's or Fitch or any of the rating agencies to get us into a high enough rating so that the insurance companies feel comfortable with it has always been our problem. But I think we are finally getting there.

If you watch the syndicated loan marketplace, single Bs and BB credits, which are not very good credits in many regards, are getting very low rates and I think it will eventually get to us. Whether it gets to us in the next 12 months is another question, but I think that is going to be our source of long-term debt is something along that line during the next 12 months.

Great, that is very helpful. Thank you.

Next question.

John Rogers, Janney Montgomery Scott.

Good morning, David. Wondering if you could talk more about the buyout activity you are seeing in 2011. I have heard a variety of different things. One, that activity really dropped off after October but a lot of the private equity sponsors are looking for a strong 2011.

Dave Dullum is going to take that.

Yes, I think, John, that that is generally true. I think, to your point, we saw a big run-up obviously right at the end of last year, calendar year and I think it's taking this first month or two here to get people back out, if you will, on the road.

I just made a swing through New York and made a call on various private equity firms, people that we obviously work with; try to support in their buyout activity. And I would say that overall people are fairly optimistic. As you well know, there is a pretty significant amount of capital in a lot of these sort of middle-market private equity firms. The clock is running and they need to get that money to work as I mentioned earlier.

What we are seeing in terms of our backlog and our pipeline, where we are indicating -- putting out indication of interest, a few cases where we actually have active letters of intent, which means we are in pretty serious due diligence and so on. So we think -- I think we look forward to a pretty good 2011, and I think better than certainly 2010 at this point.

Okay, great. Do you have -- do you release the number of letters of intent you have out there or just sort of a general level of activity?

John, we don't do that. The letters of intent are -- there is two or three phases that those go through. First phase is sort of we are interested; we would like to work with you. Then the next one is here is some terms and conditions, and then finally, of course, something that is a lot firmer than that.

So we go into a lot of detail. It's just you never know when those are going to drop out and when they are going to go forward, so it would be kind of a false sense of security if you got a lot of letters and then they didn't go through. So we don't publish those.

Okay, great. Thanks. And just one last question. I was just wondering what the competitive environment looks like in terms of both -- on the more senior end it sounds like banks are increasingly willing to provide cash flow loans. And then what about competition from sort of private mezzanine funds?

I don't think the competition is necessarily any greater today than it has been over the last year. The space we operate in, one of the value adds that we bring in our transactions that we think is very competitive is the fact that we are prepared, able, and willing to write, if you will, an equity co-investment check. And that tends to help somewhat.

So we don't really think of ourselves as going up against a pure mezz investment as far as gain is concerned, where it's just a function of rate. We are seeing mezz transactions these days [where there have been] in some cases no warrants, rates that are lower than, frankly, we would rather get into. But we typically are not going to be too active in those transactions.

So our focus, again, is where we are working either with a fundless sponsor, as we call it, which is someone who brings value to the transaction, that needs the equity that we can bring as in the two deals that we did right at the end of the year, and also the other private equity firms where they are prepared and willing to have us come in on an equity co-investment with them. That helps in the capital structure the less equity that they have to put in.

So in those cases we feel we are very competitive and it's reflective of, as we mentioned earlier, that the sort of transactions that we are looking at now that we are -- we consider sort of part of our pipeline.

Other questions, John?

No, thanks a lot. That was great and the realizations look great.

Okay, thank you. Next question.

Vernon Plack, BB&T Capital.

Thanks. And Dave Watson, this may be directed to you, but in terms of your facility right now, it's a $50 million facility and there is nothing drawn on it. You have access -- you have availability to, is it about $33 million of that?

$24 million of it.

Okay, $24 million. I assumed that since you paid off that short-term note that I think you had borrowed $8 million on -- is there anything outstanding on that line right now?

No, the line of credit, we have zero outstanding on it. The borrowed funds at quarter end just related to getting the $75 million in the short-term assets.

Right. So as of today there is nothing outstanding? You have access to roughly $24 million or $25 million?

Exactly, and we also have $42 million of cash on our balance sheet as well.

Right, right. How do you increase the availability of that line? I know it's a $50 million facility. What does it take to move from $25 million closer to $15 million?

Sure, Vernon. It's just a matter as we redeploy this cash and buy additional investments we just add it to the borrowing base, which increases our availability on the line.

Right, so as you add investments the availability actually goes up?

Exactly.

Vernon, if you put the entire $42 million into something that qualifies, they don't really like the equity. These are your bankers, by the way. But they don't really like equity, but they like the debt. If we put $42 million worth of debt on the books, we could borrow the entire $50 million.

Okay, okay, that is helpful. I appreciate that. Okay, all right, great. Thank you.

(Operator Instructions) [Lee Carter], private investor.

Good morning, gentlemen. Nice to talk with you. And as conservative as we are, right now on the -- did you say the book is $9 at the current rate?

That is right. $9 a share.

Okay. What would we expect as investor return on that $9, what percent? Remember, we used to be able to talk 20%, but I don't think that is so possible anymore.

Probably not going to get 20% today but you should get in the mid to high teens.

Should get there? Is that when you are fully leveraged?

Sure.

Which would be what, one lever to -- 1-to-1?

No more than 1-to-1. You know we can't go above 1-to-1.

Okay. If any of your company -- any of your people talking to the advertising companies --

Advertising companies for what purpose, to invest or to advertise?

No, to invest. Between 54th Street and downtown here in Grand Rapids they have built in the last year 12 new advertising venues along the road. Prior to that, there was just one so something has happened in the law that has allowed them to open up a lot of advertising along the main highways.

We do have one company that is taking advantage of that and it's moving along at a good pace.

I thought you had -- I thought I read that. I was -- I couldn't believe how many new ones had popped up there, anyway.

Okay, looking forward to better -- good and better news. Thank you.

All right. We should get a lot better, Lee, thanks.

Are there any other question? Amy, let me go this time. Are there any other questions?

I am showing no questioners in the queue right now, Mr. Gladstone.

All right. Thank you very much, everybody, for tuning in and we will see you next quarter. That is the end of this conversation.

The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.