Gladstone Investment Corp (GAIN) 2010 Q4 法說會逐字稿

Good morning and welcome to the Gladstone Investment Corporation Fourth Quarter and Year Ended March 31, 2011 Conference Call. 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 David Gladstone. Please go ahead.

All right, thank you Andrew for that nice introduction and good morning to you all. This is David Gladstone, Chairman, and this is the quarterly conference call for shareholders and analysts that Gladstone Investment -- that's has the trading symbol GAIN. And we all thank you for calling in.

We're happy to talk to shareholders. We love these moments with you. And if you're ever in the Washington, DC area please drop by McLean, Virginia. We are a suburb of Washington. Stop by and say hello. You will see a great team working for you.

Now I want to read a statement about forward-looking statements. This conference call may include forward-looking 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 risk and uncertainties, even though they're based on our current plans and we believe those plans to be reasonable.

There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including those factors listed under the caption "Risk Factors" in our periodic filings with the Securities and Exchange Commission. And those 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 these forward-looking statements whether as a result of new information, future events or otherwise.

You're going to hear from the three Davids today. Of course David Gladstone, and then David Dullum, and then David Watson. First we will hear from David Dullum, President and Board Director of the Company. He will cover a lot of ground. David, take it away.

Thank you David. I always like to start by reminding our shareholders that our primary business objectives for GAIN, or for Gladstone Investment, is being an investor in [bio] transactions of lower middle-market businesses. We partner with the management teams and private equity sponsors, and provide an important and necessary portion of the capital structure in these transactions.

Our investments are in the form of subordinated debt combined with equity. This approach provides investing discipline to be focused on generating income for dividend distributions to our shareholders on a current basis and future capital gains to enhance the overall returns to our shareholders.

As I will cover in this call, and you will hear more of this later on, the results of our activities over this past year in fact show this plan in action. 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 take some money off the table, and by selling us an equity stake in their business. And there may be situations where the owners of a business have a capital need to strengthen the balance sheet for growth.

We are currently in a favorable environment for our type of financing. And as a result, our investing activity has increased along with a pipeline of good opportunities. Let's look at some of the fund activity over the past quarter and the year.

For the quarter ended March 31, 2011 we invested about $2 million in some of our existing portfolio companies and received $700,000 in scheduled repayments. These activities cap off a very active fiscal year where we achieved successful exits from two companies in our portfolio -- A. Stucki and Chase Doors -- and reinvested a total of $35.8 million in new portfolio companies. In addition we increased our dividend to stockholders for the new fiscal year by 12.5% from $0.48 to $0.54 per share, per annum.

The momentum continues, and subsequent to the quarter end in April, we invested $16.4 million in a new portfolio company called Mitchell Rubber, which is in California. And we re-capitalized an existing portfolio company, Cavert Wire, where we were able to help the management team acquire the equity position which was our equity position, which resulted in significant capital gains for us and indeed a new subordinated debt investment for Gladstone Investment.

These transactions have helped to realign our portfolio to increase the income yield on assets. And, we are encouraged by the flow of deal opportunities and are actively looking at new transactions which should lead to additional new investments with high current income yields. We hope to continue the good news on that front.

As a result of these activities, at the end of the March quarter we had $191.4 million invested in 15 buyouts at cost and $5.8 million invested in two syndicated and one nonsyndicated loan for a total portfolio cost of about $197.2 million, and total assets of $241 million.

Turning to the overall portfolio and for an update on that, in general our portfolio companies are performing well and we are seeing some improvement in these companies. We continue to emphasize the portfolio management activity, which is one of our strengths and a very important part of our investment management approach of working to limit losses, preserve cash flow for our portfolio companies.

The 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 the companies in continuing to review their competitive positioning and talent resources, among other key business metrics.

Secondly, operating management support and this is where we tap experienced operating management talent on staff or from a pool of talent we have cultivated over the years. And three, facilitating interaction between portfolio company management teams which allows for an exchange of ideas such as best practices in purchasing, pricing and manufacturing disciplines.

The important point here is that this is an experienced operating resource that works with our portfolio company management and the companies' equity sponsors to improve the company's operations and the growth potential. We believe these activities to be extremely important and are added value to our portfolio.

Let's talk about the market place that we operate in, which is smaller companies and buyouts. As I addressed earlier, the flow of opportunities for buyouts is increasing in both quality and quantity.

The drivers for this are three things. First, the economy. Second, availability of financing for leverage. And third, private equity capital availability.

First, while the economic conditions do continue to create some uncertainty around earnings and cash flow of lower middle-market companies, we are seeing some stability. And middle-market businesses are indeed returning to profitability, and in some cases reaching or exceeding levels experienced prior to 2009, thereby increasing a supply of good businesses that might be available for M&A activity.

Second, senior debt availability is increasing with the banks beginning to reestablish leverage loan activity and setting higher lending goals for 2011 and beyond. We are actually starting to see the senior-level ratios increase up to about four times EBITDA or cash flow which is pretty significant.

Third, the private equity sponsors that we tend to operate with have significant amounts of capital to deploy and are anxious to put the money to work.

So the results of these factors are a couple of things. First, valuations relative to the trailing cash flow or EBITDA of the companies are approaching 6.5 to 7 times for good companies. And we believe these may actually move further up.

Secondly, private equity firms are able to achieve higher leverage on their deals and are able to move their equity contribution down to around 40% from around 50% in the capital structure, which is about where it was within the last nine months or so. In other words, this is a better opportunity for the private equity firms to leverage their equity.

And third, the mezzanine and the equity co-investment, which is our product, will be in demand to fill that gap between the senior lenders and the equity investors. So all in all, very positive trends for our business.

What's our pipeline look like? Well, the factors that are previously mentioned are favorable to our investment objectives as the valuations are still somewhat reasonable for good companies. The overall leverage is increasing and there is greater demand for the subordinated debt and the equity co-investment that we are able to contribute.

And having successfully navigated the many challenges of the past two years, we began to turn our attention to the increased marketing and deal-generating activity sometime around mid-last year. As a result we are experiencing an increase in the flow of both the quality and number of new opportunities for the subordinated debt and equity co-investments. However, we continue to be cautious about the economy and we will be diligent in our pursuit of new investments.

We're in a very good position currently with the capacity for new investments, which results from the funding availability of our two-year line of credit and our current cash position. You will hear more about this from David Watson.

Our increased marketing efforts and presence in the marketplace should allow us to continue on a growth trend with additional new investments over the next year.

So our outlook -- as usual, our goal for this fund is to maximize our distributions to shareholders. And we were able to increase our distributions 12.5% in April while achieving solid growth in the portfolio [from] proprietary investments in the lower middle-market company bio market.

I wish to elaborate briefly on our dividend. We increased the per share dividend as mentioned from $0.12 to $0.135 per share per quarter, or $0.045 per month, which is up from $0.04 per month, based on the forecast we have for the year ending March 31, 2012. And while our earnings for the quarter just ending March 31, 2011 was only $0.09 per share, our increase in the run rate of investment income which is where we pay dividends, including the new investments that were made shortly after quarter end, provide the basis for a fiscal year projection of net investment income and net taxable income. And therefore for Board of Directors' ability to increase the payout of our dividend per share -- a very positive outcome.

And so, David, with that I will turn it back over to you.

All right. That was a great report David Dullum. And we're excited about the future for this fund. And now I want to hear from our CFO, David Watson, on the fund's financial performance. David Watson, go ahead.

Thank you David and good morning everyone. Before I go through the financial statements, I would like to highlight several key points. First, we believe our portfolio is performing well. This is reflected in the increase in the valuations during the quarter of $0.9 million. It is also reflected in that all but one of our portfolio companies are current with interest and principal payments.

Second, at the time of this call we have nothing borrowed on our line of credit and we have $27.5 million in cash on the balance sheet. So we have the ability and the flexibility to deploy more capital for the right opportunities.

Third, after quarter end we did deploy $16.4 million in a new portfolio company, Mitchell Rubber, and recapitalized an existing portfolio company, Cavert Wire, resulting in realized gains and additional income.

And lastly, net investment income remained stable. For the fiscal year it covered 100% of all of our dividends to stockholders. This is our second year in a row where all of our distributions were covered by taxable income and highlights our commitment to prudent growth and preservation of stockholder capital.

Our recent investment activity allowed us to increase our dividends to stockholders by 12.5% starting in April 2011. Like the past two fiscal years, we have forecast 100% of distributions paid in fiscal year ended March 31, 2012 to be covered by taxable income.

Now for the details, and I will start with the balance sheet. At the end of the March quarter we had $241 million in assets consisting of $153 million in investments at fair value, $81 million in cash and cash equivalents, and $7 million in other assets. Included in the cash and cash equivalents is $40 million of US Treasury securities through the use of borrowed funds at quarter end to satisfy our asset diversification requirements.

Therefore at the March quarter end we had no borrowings outstanding on our line of credit, $40 million borrowed via the short term loan, and had $199 million in net assets. So we were less than one to one leverage on our senior secured borrowings. We had a net asset value of $9 per share.

Currently we have $166.2 million in investments at fair value, cash at $27.5 million and no borrowings. We believe this to be a safe and conservative balance sheet for a Company like ours and we believe our overall risk profile is low.

Moving over to the income statement, for the March quarter end total investment income was $3.8 million versus $4.7 million in the prior-year quarter. While total expenses including credits were $1.9 million versus $2.0 million in the prior-year quarter, leaving net investment income -- which is before appreciation, depreciation, gains or losses -- of $1.9 million versus $2.7 million for the quarter last year, a decrease of 29%. This decrease primarily resulted from an overall decrease in the size of our loan portfolio as compared to the prior-year period, partially offset by the increase in our weighted average yield on interest-bearing debt investments to 11.8% compared to 11.1% in the prior year period.

For the 12 months ended March 31, total investment income was $26.1 million versus $20.8 million in the prior-year period, while total expenses including credits were $9.9 million versus $10.2 million in the prior-year period, leaving net investment income of $16.2 million versus $10.6 million for the prior year, an increase of about 53%.

The primary driver of the current income versus the prior year's income for the 12 month period ended March 31 was due to success fee and dividend income resulting from our exits from A. Stucki and Chase in June and December of 2010 respectively, success fee prepayments from Cavert and [McKay], and due to an increase in our weighted average yield on interest-bearing debt investment to 11.4% which is up from 11% last year. All of this partially offset by an overall decrease in the size of our loan portfolios as compared to the prior year.

Let's turn to realized and unrealized changes in our assets. Realized 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. With 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 March 2011 quarter end, there were no realized gains or losses. For the March 2011 year-end, we exited two proprietary investments, A. Stucki and Chase, for a total proceeds of $92 million and recorded realized gains of $23.5 million. Also after year-end we recapitalized Cavert Wire and sold our common equity position, resulting in a $5.5 million realized gain.

For the March 2011 quarter end we had net unrealized appreciation of about $0.9 million over our entire portfolio. During the year ended March 31, 2011 we recorded net unrealized depreciation of investments in the aggregate amount of $23.2 million, which included the reversal of $21.9 million in aggregate unrealized appreciation related to the A. Stucki and Chase sales.

Excluding reversals we had $1.3 million in net unrealized depreciation for the year ended March 31, 2011. Our entire portfolio was fair valued at 77.7% of cost as of March 31, 2011. 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 distribution.

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 realizes gains and losses. Please note that we're talking about weighted average fully diluted common shares when we use per-share numbers.

For the March 2011 quarter end, this number was an increase of $2.8 million or $0.13 per share, versus an increase of $20.6 million or $0.93 per share in the prior year's March quarter. The year-over-year change is primarily due to the large unrealized appreciation recorded in the prior-year quarter.

For the March 2011 year-end, the net increase/decrease in net assets from operations was an increase of $16.4 million or $0.74 per share, versus a decrease of $11.1 million or $0.50 in the prior year. The increase in net investment income and realized gains, partially offset by the reversal of unrealized appreciation upon realization in the current year, drove the net increase in net assets from operations.

While we believe our overall investment portfolio is stable, as demonstrated by cumulative net gains over the past five quarters, and continues to meet expectations, today's markets move fast and are generally volatile. And investors should likewise expect volatility in the aggregate value of our portfolio.

From an asset quality standpoint, the risk rating system we use [net] our proprietary loans which represent over 96% of our portfolio at a weighted average of 5.9 for this quarter, which is unchanged from the quarter ended March 31, 2010. 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.

Historically we had concentrations of variable rate loans in the syndicated markets, while we have sold or exited 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 with the low interest rates that we've experienced over the last two years, these floors have minimized the negative impact on our ability to make distributions.

We have 139 million at cost in fixed-rate loans or rates with a fixed floor. In other words, over 99% of our debt investments at cost have a floor or are fixed. They're also at relatively high rates, so we should be okay.

In addition, we purchased an interest rate cap on $25 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 couple of years.

As of March 31, 2011 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 reported $5000 and $12,000 during the quarter and year ended March 31, 2011 respectively, results in recording non-cash income for which we distribute out to our stockholders under tax rules. We believe ours is extremely minimal.

Currently all of our portfolio companies are paying current, except for ASH which remains on nonaccrual this quarter.

On a final note, I wanted to touch on our distributions. You may have noticed that for the year ended March 31, 2011 we have had net investment income of $16.2 million and have only distributed out $10.6 million during the 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 through December 31, 2010 success fee income for which we have an excess of $5 million 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 did not renew our line of credit, and we had to sell our syndicated loans in 2009 at a large capital loss.

This being said, we continue to strive to increase our income generating and assets to increase our recurring income and to increase our distributions to our stockholders, like we did with the 12.5% increase in April 2011. With that, we look forward to maintaining momentum in the fiscal year March 2012. And now I will turn the call back over to David.

All right. Thanks David Watson. That was a good summary of our financials. But I do hope that our listeners will read our press release and also obtain a copy of the Annual Report called the Form 10-K, which has been filed with the SEC and can be accessed on our website www.GladstoneInvestment.com and on the SEC website.

I think the big news for this year is that we recovered from the recession and we're on the way back up. There is no big news there, except that the world seems to have changed in our direction. We have a nice line of credit with BB&T and KeyBanc and room to borrow under the line, and we have a lot of cash to invest. So as you can imagine, we are out looking for new transactions and doing one or two here or there, and we have a good pipeline that is going forward as well.

We did feel that the timing was right and we sold two of our good investments -- A. Stucki and Chase Door -- for very strong profits, primarily because they wanted to continue to grow and we didn't have room to give them more money. We consider the results of these two transactions again as proof of our business concept and our method of operation.

And although we have more companies like this in our portfolio, we're really not looking to sell any of them until we redeploy all of the capital from these past transactions, that is the businesses that we sold. And also would want to use not only that cash but also borrow on our line of credit before we decide to sell any, if at all.

We need to increase the asset base. And we have very good investments in our portfolio, as well as some that we are looking at. We're really hopeful that we can close at a lot of deals this year and look really strong for the March 31, 2012 period.

As we redeploy the profits, you should see more in the way of income in the fund and you should see long-term profits in the future. I think this fund is in a fabulous opportunity now for the future.

And just to note before we go forward, while the valuations of our portfolio was about 77% at cost, and that was the same as it was more or less December 31 and even the quarter ending September, the reason behind all those lower levels is that the portfolios removed two of our outstanding investments, of course, the ones that we sold. And that cash is really not in our portfolio of investments. If you put that cash back into the portfolio obviously you value the cash at 100%. That would boost our ratio to about 81%.

And also the capital gains and the extra income that we made from those two investments that were sold, the losses have overcome the losses that we had when we were forced to sell our assets and pay back Deutsche Bank. This means that future capital gains are likely to be paid out to shareholders, since we don't have that tax advantage that we have today.

Just to mention, as I always do, what we're worried about. We continue to worry about the cost of oil because we believe it has to go up as the economy continues to move out of recession. The United States is much too dependent on foreign oil. We need to increase our domestic energy sources, such as coal.

We have billions of BTUs in coal. We have enough natural gas to use up for the next 100 years. And we are doing very little with nuclear; we only have about 20% of our electricity produced by nuclear. There's no reason not to double that, to go to 40%. So we would like to see that move along.

The trade deficits with China of course and other countries continue to drain our economy. China subsidizes their business and sells the products under the free trade agreement back to us. China, as well as many of the Asian countries, has [destroyed] thousands of businesses and the US jobs here. It's just a crime to watch that happen.

China and others continue not to buy our debt. So, not only are they selling us the product, but the dollars they get they're not using to buy our debt. And that is just again another indication of how difficult it is to deal with those folks.

My own personal view of China is that they're having big problems today. The economy will suffer in the next 18 months and I think it will have a big impact on all of our economies, not just theirs. So there is some worry there.

I was reading a report that said they are continuing to build office, apartments and other buildings and there's just no one there to rent them at this point in time because no one can afford it. And the banks keep lending money to build them. At this point in time there is about 64 million -- and that is 64 million apartments that have no tenants. And at the same time they keep building them.

It's just a general work project. Many governments do that, but this one seems to be over the top.

We're now worried about inflation. This comes from printing off so many T-bills. We hadn't worried until we saw what was going on in terms of who is buying. We're now worried that the dollar will have a big depreciation over the next 18 months.

Inflation is definitely on the way and the dollar will decline in value, and that is going to hurt all the folks on fixed income. And it will hurt the people who have fixed income bonds that they are holding. So my guess is we are in for some pretty substantial inflation and that will hurt not only some companies, but most of the companies that are selling overseas.

The amount of money being spent on the war in Iraq and Afghanistan is hurting. I think our soldiers are wonderful, of course, and we support our troops and all that they do for us. However, the war is draining our economy and praying that that ends soon.

But even worse than the continued spending on things that don't seem to matter so much is the pork barrel spending of the federal government. My estimation is that they are acting very irresponsible. They're spending trillions of dollars on wasteful projects, so-called stimulus projects that are filled with things that really just line the pockets of supporters of both this administration and past administrations. It is amazing how much money is being spent to support political objectives.

State and local governments, however, are not spending nearly as much as they did before. In fact about 40 states are having severe budget problems. I've watched for some defaults on municipal bonds and that will be another downer for both our markets as well as many of the markets overseas.

All the money being spent -- and you can't believe this -- very little of the money is being aimed at small businesses. And this is a big mistake because small businesses create about 80% of all the new jobs. And the new spending is missing the opportunity to stimulate small business.

Congress says they're going to do a lot to help small business. But they almost never do, and we really do need term limits to change out the Congress and get some folks in there that are more oriented toward creating jobs.

Despite all of this, in other ways the US economy continues to chug along. Obviously this has been the longest recession. We call it The Great Recession around here. And it continues to permeate through lots of things.

And those businesses that were not related to housing or autos or financial institutions, those businesses that avoided those traumas continue to be getting stronger. But quite frankly, all of the industries have suffered due to the bad acts of a few. And many of the entrepreneurs and small business owners and savvy managers have kept their costs low and they have suffered from the decline. But they are just not growing as fast as we would all like to see them grow.

We are lucky at this Company and the other Gladstone entities that so many of our portfolio companies are still doing okay. I mean, it is a real testament to the tenacity of these entrepreneurs that run these businesses.

Employment is far worse than we forecast. The unemployment rate, the government continues to report a percentage of out of work people as going down. But the government is really not counting how many have given up, counting given up looking for jobs and not counting the part-time workers that would like to be full-time.

And really employment is not going up as much as rather the number of layoffs is declining. The figure for unemployment, our best guess, is 15% unemployment today and I know there a lot of other people with figures in that amount.

I think we're the bottom of the recession. And while it may take us another six months to know that we're now coming out and moving forward in a strong way, I don't believe there's another downturn. I don't think we're going to second down as so many of us had worried about for so long. Anyway that is my overview of what's going on.

The distribution declared by the Board of Directors in April increased by 12.5%. That's another half per penny per month in April, May and June. This is a run rate of $0.54 per year per share. The Board next meets in July to consider vote for the dividend for July, August and September.

With the stock trading at $6.81 as it was yesterday at the close with 7.9% return for a Company as conservative as this, with little or no debt, it is just an amazing return for folks that we have no intent on cutting the distributions. And hopefully this year we can look at increasing them again, so buyers of the stock today are getting a fabulous return.

Just want to advise you all, please go to the website and sign up for e-mail notification service. We don't send out junk mail, just news about your Company. It is all at www.GladstoneInvestment.com is the site.

And in summary, as far as we can see the rest of the calendar year, 2011 looks much better than 2010. But again, we are looking out only a couple of quarters as best as we can.

We are stewards of your money. I think the worst is behind us. Now we have a good base to build from. We've got a good solid base in the companies we have and we're looking at a lot of new investments, so expect to see some press releases about things that we are closing on.

That is an overview. Now let's have some questions. So Andrew, if will come on and lead us into questions and answers please.

(Operator Instructions).

This may be the first time in history we have no questions. There must be something broken on the line.

JT Rogers, Janney Montgomery Scott.

Had a question for you on -- I was wondering if you could talk about your investment in Mitchell Rubber and sort of generally what you're seeing in terms of new investment, sort of the breakdown in I guess both the structure of new investments and what kind of yields you are seeing.

JT, I'm going to let Dave Dullum do that. He's on the line fighting the battle every day.

So what is the question specifically on Mitchell?

I just wonder what you saw in the Company, what the breakdown is between your sub debt and your equity investment, and then sort of generalized what kind of yield you are expecting on the debt.

Mitchell is a good example, I think, of these sorts of deals not only we are aggressively pursuing but currently looking at where we are, indeed, as we did in that [once] supported the guy running the business. He was actually a part owner of the business. So we helped him to buy out another shareholder. As a result of that we ended up on a fully diluted basis with roughly about 40% ownership and he, along with the rest of the management, about 60%.

So we are the only equity, if you will, and sub debt in that transaction. Our breakdown -- approximately about 13% -- well, interest rate on our debt is about 13%. And of the total of roughly about $16 million invested, about $13.6 million of it is in the sub debt and $2.8 million is in a preferred. (multiple speakers) So the rough mix that we would have in most of our deals going forward.

Okay, great. And so obviously it varies, but do you think yields around 13% are what you would expect on new investments? And are those floating or fixed?

Typically they are fixed. But we have a floor, so it would be a LIBOR plus with either a LIBOR floor or a floor on the whole investment. We sort of target an all-in current yield in the sort of 12% plus if we can get it, depending on how much equity is required and so on.

But generally, our split is going to be about 80% of every dollar we would put in a deal would be in the sub debt portion. About 20% would be in the equity portion.

Okay, great. And then I was wondering if I could just get an update on Noble Logistics and Quench Holdings. Noble looks like the valuation is improving there. Is that fundamentally driven or is that increasing valuations? And then on Quench Holdings I guess it weakened. I guess the same question there; is that fundamentals or a change in the multiple?

Okay, I missed one part. You broke up a little bit on Noble. I think you may have suggested (technical difficulty) improving. Let me quickly address Noble.

Indeed we've been working very hard with that company. They are seeing improvement in their cost structure and the way in which we manage that business. So as a result of that, we're seeing improvement in both EBITDA. And of course generally, when we do our valuations of course we're seeing an uptick in the multiples in the marketplace in general. So the combination of those two things is certainly giving us support of let's say an upward trend in valuation.

On Quench, Quench is more of a very equity oriented transaction. We have -- the majority of our investment in there is debt, frankly. So again, that business is doing well.

The equity group that really is running that, they're making some significant equity investments in that transaction and we think that is going to be a good business overall. But again, it's really more function of the multiple came down a bit on that one. So when you multiply that by the actual run rate EBITDA you saw a slight decline in the valuations.

I think business generally they are making progress in getting installations of the water machines and so on. So the valuation is more function of just the combination, again, of multiple -- enterprise value multiples coming down and the equity value as a result of that going down slightly. But the majority of our investment there is in debt.

Okay, great. Thanks a lot. It looks like Southeast is already appreciating. It looks like that is going to be a good investment.

Yes, Precision Southeast you mean.

Precision Southeast, yes, excuse me.

We made that investment right near the end of last year. That is a nice business. Again, that is one where we're the significant shareholder along with management and one we think has some real opportunity for not only organic growth, but frankly part of our thesis was potential add ons as we go forward.

Great, thanks a lot.

[Lee Carter], a private investor.

I wanted to ask you, did you have any success with Wells Fargo?

No, no success there, sorry.

Nothing there? Are you still looking to cover those three companies?

Yes.

[Are you]? What would it be if somebody would loan you, say, 75% for easy figure, a ten-year bond with a five-year non -- whatever you want to call it, and the 20% a year payoff, so the average life of the bond would be 7.5 years. Would that qualify, something like that?

Sure. You know anybody that has that, could give us that kind of loan?

No, I just wondered if the would satisfy your [length] anyway. There might be somebody of interest. That's why I was inquiring.

We have a couple of people, I will call them insurance companies, that are interested. They're just not there yet. We don't need them today, but we have a plan for the future. So we are talking to long-term lenders.

Okay. It seems to me that you should be able to, with the way things are going we should have a $10.00 book by the end of the year?

Well, we certainly hope to be there. We are only about $9.00 today, so we should wish for appreciation. But I don't really worry about the book so much as producing income for dividends. That is where my whole focus is and I think this Company is looking very strong in that area.

Okay. Well, I don't have anything else. I think it is coming along quite well now, and you should be sitting in the driver seat right now.

We're driving pretty good. We've got our foot on the gas pedal.

You have 15 loans that you've had for almost 5 years. It looks to me like two or three loans should be working to pay off or something like that per year over the next three to five years.

Well, they may. A lot of times we extend it because they want to continue to grow and don't want to have to raise capital. So we can do that as well. I love it when people keep paying us 12%, 13%. In fact, I would like them to stay on the books for eternity.

Forever, right. Thank you, gentlemen, keep up the good work.

Ross Haberman, Haberman Management Corporation.

Just a quick accounting question, the gain you took this past month, of $5.5 million gain which you discussed here. Was that valuation wish and already baked into your $9 net asset value? Or if I my math is right, after-tax, that would add about $0.22 or $0.23 to the NAV?

It was already baked in. Unfortunately we would like to add another $0.02 or $0.03, or $0.20 for that matter, but it was already in. We knew that was coming. In fact we helped time it for after the close at the end of the quarter.

Okay, got it. And generally, I'm hearing from a lot of BDCs that a number of these smaller companies, if they can, were going to try to refinance and get out of this 12% or 13% or 14% high cost debt. Are you seeing that? And do you expect that to continue to happen as the economy slowly gets better?

Well, we haven't seen it to date but you're probably referring to the fact that the syndicated loan marketplace has gotten hot as a pistol. And even the second liens there that are in the 10% and 11%, some 12% range all in cost will probably get refinanced in the next year because the market continues to be hot.

As you know, the amount of money going into these senior loan funds sponsored by the brokerage houses has been astronomical -- $600 million, $700 million a day. And so as a result the marketplace has picked up dramatically. And just about anybody who wants long-term financing that is a large operating company, as opposed to a finance company, can get some can get some pretty reasonably priced money.

But the second liens are still holding up in that around 10% range and I don't see that going away right now. People are still holding onto 3, 3.5, maybe 4 turns of EBITDA in terms of financing their businesses with senior liens. And the senior lien buyers haven't gone crazy get. They may, but they haven't gone crazy yet and moved up into the 4 and 5 range where most of the second lien stuff is price.

It is coming. It always comes. Maybe it won't come this time for another two or three years, but my guess is some time next year this time we will see that marketplace pick up again. And I don't know what that will do to hours.

Over time I suspect we will see some lower price people, maybe some of the local banks come into our market place and re-price. But they are certainly not there now, and the government regulators are all over them. So I don't expect to see them in the next year, but it could happen.

And Russ, I think the other thing is it affects us specifically. We tend to operate in the sort of $10 million below EBITDA range. I think there is sort of a magical breakpoint at that level, so I think what you find in our market space those prices are sort of holding. And that is where we tend to operate.

Thanks guys. Best of luck.

(Operator Instructions) Mr. Gladstone, there are no further questions at this time.

All right. Thank you all for dialing in. We will see you next quarter. That is the end of this conference call.

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