Gladstone Investment Corp (GAIN) 2011 Q3 法說會逐字稿

Good morning, and welcome to the Gladstone Investment Corp. third-quarter ended December 31, 2011, shareholder conference call. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to David Gladstone, Chairman. Please go ahead, sir.

All right. Thank you, Denise, for that nice introduction and all the instructions, and hello out there and good morning.

This is David Gladstone, Chairman, and this is the quarterly conference call for shareholders and analysts of Gladstone Investment. That trading symbol is GAIN, and thank you all for calling in. We're always happy to talk with shareholders, and I'd like to see some of you come by and see us if you're in the Washington DC area. We're here in McLean, Virginia, a suburb of Washington. So next time you're in the area, stop by and say hello. We'd be very pleased to see you. I know you'll see a great team at work here. I think they're the best in the business.

Now let's read the 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 risks and uncertainties, even though they are based on our current plans and we believe those plans to be reasonable. There are many factors that may cause our actual results to be materially different from any future results that are expressed and implied in these forward-looking statements, including those factors listed under the caption, quote, risk factors, end quote, in the periodic filings that we file with the Securities and Exchange Commission, and those can be found on our website at www.GladstoneInvestment.com and 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.

As we always start out, we'll start with Dave Dullum. He's President and Director of the Company. He will cover a lot of ground, including his views of the future of this fund. So, Dave, take it away.

Thanks, David, and good morning all.

We continue to hold to the plan for Gladstone Investment, which is to invest in buyout transactions of businesses in the lower middle market. Our investments generally take the form of some senior debt, primarily subordinated debt, and equities. This combination produces a mix of assets in our portfolio, which we believe is key to our strategy.

Our debt investments provide income to grow our dividends while we build shareholder value through capital appreciation of our equity investments. For instance, at this quarter end, 12/31/11, our investment assets at cost consisted of approximately $188 million, or roughly 71% of debt investments, and about $75 million, or 29% in equity securities, which over time we hope will produce the capital gains.

This ratio of 71% to 29% is slightly higher in equity than our goal of 80/20, and this past quarter was due mainly to certain loan payoffs and a debt-to-equity conversion in a portfolio company, though we seek to have this ratio track towards 80/20 over time.

So we believe the 80/20 ratio will provide the appropriate balance to be competitive in our marketplace, achieve our long-term growth plans, and result in payment of increasing dividends to our shareholders.

I wish to emphasize the point, though, that while the portion of our assets we hold in equity securities is not producing income, the debt proportion is. And in the most recent quarter, our total interest-bearing debt portfolio had a 12.5% current cash return, which is the primary source to pay our dividends.

Additionally, we often negotiate as a component of our debt instruments what we call success fees. These are enhancements to the return. And when we receive these success fees, generally upon exiting an investment, that extra income is designed to enhance the total returns on our investment, keeping in mind that success fee income, which can be lumpy and, although significant, is not reflected in our reported debt yields on a current basis, which we generate based on monthly cash interest payments from the debt investments.

The other component, equity, which we acquire through the purchase of stock in the companies, while not producing a current cash income, we believe will appreciate in net value over time. As an example, since mid-2010 we have realized capital gains of approximately $28.6 million through stock ownership in various portfolio companies. And as we grow our portfolio, we will seek to increase the interest income to pay dividends, but also seek asset appreciation through growth and equity value of the stocks that we own.

We believe this strategy is working, and our net asset value -- or book value per share is a good indicator of that in that it has grown over the last year from about $9.00 per share as of December 31, 2010, to $9.58 as of December 31, 2011, for an increase of about 6.4%.

So our primary goal is to grow our dividend payout to shareholders while increasing total value.

From a deal origination standpoint, we generally obtain our investment opportunities by partnering with the management teams, private equity firms, and other sponsors of buyouts. Our combination of debt and equity gives us a competitive advantage. It provides two important and necessary portions of the capital structure in these buyout transactions.

In addition, we may find opportunities to provide capital in support of business owners and management teams who are not seeking to sell their company outright, but to sell a portion of their company to us. In this case, we will invest in debt and equity in exchange for a significant ownership in their business. In other cases, where the owners of a business have a need to strengthen their balance sheet for growth, we would invest in debt and equity for this purpose.

In terms of the activity for the quarter ended December 31, we invested in one new buyout, a company called Channel Technologies, Inc., for a total of $18.5 million, of which $16.9 million was in senior and subordinated debt combined and $1.6 million in equity. This investment was made to support a private-equity sponsor and the management team of Channel to purchase the business from the previous owners.

Channel, briefly, designs and manufactures ceramic, acoustic, and calibration products used in the military, commercial, and medical applications. Regarding the military, it is predominantly towards the Navy submarine business, which we think is a good one relative to the budget issues that we all face in the government.

During the quarter, we also deployed $400,000 to one of our existing portfolio companies. We also received $11.4 million in repayments, which includes a payoff at par of one of our syndicated notes, American Greetings Corporation, and one of our proprietary loans, Quench Holdings Corp. That Quench loan actually was valued at 75% of principal at March 2011, but did pay off at 100%, so this was a nice gain in relative value.

As a result of these activities, at the end of the December quarter we had $264 million invested in portfolio companies at cost and total assets of $319 million. We maintained our dividend, stockholders, for the current quarter of $0.05 per month per share, and since March of 2011 we've been able to raise our dividend by a total of 25%.

In general, our portfolio companies are performing well and we are seeing improvement, as reflected in our quarter-over-quarter increase in portfolio valuation, which was approximately 1%. Since March 31, 2011, the portfolio valuation has increased by about 8.5%.

So, actually on these calls, usually I like to acknowledge the value of our portfolio management activity, which we believe is really one of our strengths. It is an important part of our investment management approach where we work to limit losses, increase equity value, and preserve cash flow for our portfolio companies.

The portfolio management team provides value-added services such as, one, strategic and business planning, and this is where we work with outside resources to assist the portfolio companies in continuing to review their competitive positioning and their talent resources, among other key metrics.

Secondly, our team also helps with operating management support. In this activity, we tap experienced operating management talent who are either on our staff or from a pool of talented folks that we have cultivated over the years. They help the portfolio companies streamline operations and evaluate, where appropriate, add-on acquisitions for those specific companies.

Third, we also organize conferences for the CEOs of our portfolio companies. This activity facilitates interaction between our portfolio companies' management teams so that they can exchange ideas, such as best practices in purchasing, pricing, organizational health, and manufacturing disciplines. The last conference we held was in October 2011. It was a great success.

We believe these activities to be extremely important as a competitive strength while we add value to our overall portfolio.

So in looking at the flow of deals, the marketplace, so to speak, we're seeing these opportunities for buyouts continue to be good in both quality and quantity, and there are really three drivers, as we see it, for this. First, while the general economic conditions create some uncertainty, we do continue to see improved stability and more middle-market businesses actually returning to profitability. This improvement in profitability is causing an increase in supply of good businesses for sale as owners are taking advantage of these recent positive results.

Second, senior debt, which is important for leverage, is available at attractive rates, and we're seeing the lending ratios of these, relative to the EBITDA or cash flow, being at around 2.5 times, which is pretty attractive.

Third, the private-equity funds that generally sponsor these buyouts do have significant amounts of capital to deploy and, because they're anxious to put the money to work, that tends to add to the activity in the space.

The result is, first, we are finding opportunities where the valuations relative to the trailing cash flows are about five to 6.5 times for really good companies. Now we are seeing some that are higher than these valuations, and frankly, we tend to avoid them, and therefore it means that we will miss some investing opportunity as we do not like those risk/reward profiles.

Secondly, these private-equity firms, as I mentioned, are able and willing to increase the equity portion, in some cases up to 50%, of the total capital required for a transaction, and therefore the mezzanine and the equity co-investment, which is where we play, is in demand to fill the gap between the senior lenders and the equity investors. So, a good outcome for us.

So these factors, as I just mentioned, are favorable to our investment objective. We are active in our marketing and deal-generating activity where we stress our competitive advantage of being able to provide the subordinated debt and the equity to complete a transaction.

However, as usual, we continue to be cautious about the economy and we will be diligent in our pursuit of new investments. Our marketing efforts and the presence in the marketplace should allow us to continue on a growth trend with additional new investments over the next year.

So our goal for this fund is to maximize distribution to shareholders, which we increased, as I mentioned, a total of 25% since March 2011, while achieving solid growth in both the equity values and the assets in the portfolio through proprietary investments in the lower middle-market company buyout arena.

And so, David, this concludes my part of the presentation.

Thanks very much. It was a great report, Dave Dullum, and we share your excitement about the future of this Company.

Now let's hear from our Chief Financial Officer, David Watson, on the Company's financial performance for the quarter.

Good morning, everyone.

Before I go through the financial statements, I would like to highlight several key points. First, our closing on one new buyout, Channel, during the quarter, totaling $18.5 million, highlights our commitment to steady investment growth. Since October of 2010, we have invested in six new portfolio companies, totaling $114 million.

Second, we believe our portfolio is continuing to perform well. This reflected in the $1.7 million of net appreciation on our portfolio of investments during the most recent quarter and $13.1 million since March 31, 2011.

Third, we extended the term on our line of credit with BB&T and KeyBanc, increased its size, and decreased the interest rate. At the time of this call, we have $21 million borrowed on our line of credit and we have about $2.1 million in cash on the balance sheet, and we have the ability to deploy more capital for the right opportunities.

And lastly, we forecast that 100% of our distributions paid in fiscal year ending March 31, 2012, to be covered by income and not a return of capital, which highlights our commitment to sustainable distributions and preservation of stockholder capital.

Now for the details, and I'll start with the balance sheet. At the end of the December quarter, we had $319 million in assets, consisting of $227 million in investments at fair value, $86 million in cash and cash equivalents, and $6 million in other assets. Included in the cash and cash equivalents is $85 million of U.S. Treasury securities through the use of bond funds at quarter-end to satisfy our asset diversification requirements.

We had $107 million in liabilities, which consisted of $29 million in borrowings outstanding on our line of credit, $76 million borrowed via short-term loan, and $2 million in other liabilities. In all, we had $212 million in net assets, or $9.58 per share. So we were less than 1 to 1 leveraged on our senior secured borrowings.

As mentioned briefly in my opening remarks, we renewed our line of credit with our good friends over at BB&T and KeyBanc on October 26, 2011. We increased the size from $50 million up to $60 million, with the potential to expand to a maximum of $175 million.

We extended the maturity from April 2012 to October 2014, with two one-year extension options as agreed to by all parties. That could push out the maturity to October 2016, with all principal and interest due by October 2017. In other words, the term of this transaction has the potential to be six years.

The interest rate decreased from one-month LIBOR with a 2% floor plus 4.5% to one-month LIBOR with no floor plus 3.75%. So based on where LIBOR is today, our interest rate is approximately 4%, which is down significantly from 6.5% under the previous terms of the line of credit.

Lastly, the unused fee is 0.5% at all times. Previously, it was between 0.5% and 1%, depending on our borrowings that were outstanding.

We believe this is a good deal for our Company and we hope to utilize it to make more quality investments.

Currently, we have $226 million in investments at fair value, cash of $2.1 million, and $21 million in borrowings. We believe this to be a safe and conservative balance sheet for a Company like ours and believe our overall risk profile is low.

Moving over to the income statement, for the December quarter-end, total investment income was $5.2 million versus $10.7 million in the prior-year quarter, while total expenses including credits were $1.7 million versus $3.1 million in the prior-year quarter, which leads net investment income, which is before appreciation, depreciation, gains, or losses, of $3.4 million versus $7.6 million for the quarter last year, a decrease of 54%.

The decrease was primarily due to other income of $6.3 million that we recognized from the sale of Chase in December of 2010, partially offset by an incentive fee expense of $1.9 million during the prior-year period and due to a larger interest-bearing portfolio and a higher yield on debt investment resulting from the new investment activity since December 31, 2010, which increased our interest income by $1.2 million during the current quarter.

In other words, excluding the impact of other income and incentive fees which primarily related to the Chase exit last year, net investment income was up $0.7 million, or 25%, during the three months ended December 31, 2011, compared to the prior-year quarter.

Lastly, I think it is important to point out that our weighted average yield on interest-bearing debt investments increased to 12.5% in the current quarter, up from 11.5% in the prior-year quarter, which primarily resulted from the addition of approximately $88 million of new higher-yielding debt investments that we have made since October of 2010 that have a weighted average interest rate of 13.2% as of December 31, 2011.

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.

Regarding our realized activity, from the December 2011 quarter-end we had a net realized loss of $0.1 million, primarily related to the sale of Neville Ltd., partially offset by a post-closing adjustment gain related to A. Stucki exit in June of 2010, which we realized in the current quarter.

During the December 2010 quarter-end, there was a $6.9 million realized gain on our sale of Chase in December of 2010.

As for unrealized activity, for the December 2011 quarter-end, we had net unrealized appreciation of $1.7 million over our entire portfolio, which was primarily due to increased performance at certain of our portfolio companies and, to a lesser extent, increased multiples, which resulted in notable appreciation in our equity investments.

Our entire portfolio was fair-valued at 86% of cost as of December 31, 2011, and our stock is trading at 87% of fair value. This means that the current price of our stock is 74% below the cost basis of our net assets.

The cumulative net 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.

During the quarter, we had another component of unrealized depreciation, which related to the fair value of our credit facility. For the quarter ended December 31, 2011, we recorded an unrealized appreciation of $0.4 million. The renewal of the credit facility occurred through an orderly transaction during the three months ended December 31, 2011, and cost was determined to approximate fair value.

Now let's turn to net increase in 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 2011 quarter-end, this number was an increase of $5.5 million, or $0.10 per share, versus an increase of $15.1 million, or $0.57 per share, in the prior year's of December quarter. The year-over-year change is primarily due to the $6.3 million in other income recorded in the prior-year quarter and the net realized and unrealized gains on investments in the current quarter of $1.7 million, as compared to net realized and unrealized gains on investments in the prior-year quarter of $7.5 million.

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

From an asset-quality standpoint, the risk rating system we use set our proprietary loans, which represents 100% of our portfolio, at a weighted average of 5.3 for this quarter, which is down from 5.9 in the quarter ended December 31, 2010. Our risk rating system gives investors a probability default rating for the portfolio with scale of zero to 10, with zero representing a high probability of default. We see the risk in this portion of the portfolio as staying relatively the same as prior quarters.

Currently, all of our portfolio companies are paying current, except for two, ASH and CCE, which both remain on non-accrual this quarter.

Regarding interest-rate risk, 76.6% of our loans have variable rates, so they all have a minimum or floor in the rate charged. So with the low interest rates that we have experienced over the last two years, these floors have minimized the negative impact of our ability to make distributions.

The weighted average floor on our variable-rate loans is 3.1%. The remaining 23.4% of our loans are fixed, and we believe they are at relatively high rates. The average on the fixed-rate portfolio loans is 10.2%.

On the other side of the balance sheet, in the event we have borrowings outstanding, we have an existing interest rate cap on $45 million of the debt on our credit facility in order to have some protection (multiple speakers) if interest rates rise over the next couple of years.

With that, we look forward to maintaining momentum and hope to continue to increase our income-generating assets to increase our recurring income and to increase our distributions to stockholders. Now, I will turn the call back over to David.

All right. Thank you, David Watson. You got through that with your bad cold, and we appreciate that.

I hope each of our listeners will read our press releases and also obtain a copy of our quarterly report, called the 10-Q, which has been filed with the SEC and can be accessed on our website, www.GladstoneInvestment.com, and on the SEC website.

I think really the big news in the first nine months of the fiscal year was that we believe we've recovered from the recession and on a good way back up. As you can see, the net asset value moved from $9.00 in March 31, 2010, to December 31, 2011, at $9.58, 6.4%, and we're putting some new deals on the books.

We do have a favorable and new three-year line of credit with BB&T and KeyBanc, and room to borrow under that line. We are also looking for new transactions, and I think we're also looking and hope to find another bank to join the line of credit.

We closed another promising investment this quarter. We had some loans marked down by our valuation service that paid off at 100%, and this is an indication that we do bring investments back from problems that they might have and get them back to a period where we can make additional money from them.

The next step in our fund is to obtain some long-term credit from lender and capital markets, and we're exploring that now. We're looking at debt and preferred stock and we have some serious offers for long-term debt, so we're looking at that as well.

This is really a fabulous fund at this point in time and a great opportunity for the future, so we're very excited about this fund's opportunity in the next 12 to 18 months.

Everyone always asks me what we're worried about, what could happen to us, and of course we worry about the cost of oil because it has such an impact on everything. I filled up my car yesterday and it was at $3.60. And just to compare that, in China, for example, they've subsidized their gasoline prices there and if I was filling up in China it would probably be $1.80 per gallon.

This trade deficit we have with China and other countries just continues to drain our economy, and China does subsidize their businesses and China has destroyed thousands of businesses in the U.S. and caused loss of many jobs. And every time we look at a business to buy into them, we have to ask the question of how could China damage us or damage this business. So it is one of the threats that we worry about.

We are also very worried about inflation now. This comes about by printing so much money and borrowing so much. We worry that the dollar will have a big depreciation over the next year. Inflation is coming. We all know that. It hasn't come that yet, primarily because the government is propping all of that up.

But this is going to hurt a lot of people, and when the government needs money, it seems like every time they turn around and borrow more money, they're really just putting it on all of us, on our credit card, in essence, and we'll have to pay it back someday.

The amount of money being spent on the war in Afghanistan is hurting. We think our soldiers are wonderful. We hope they get home soon and we're glad to hear that that war may be over in 2013.

Even worse than all of these things going on, and I keep complaining about it because it is so damaging to everybody, is that the federal government continues to spend enormous amounts of money. It looks like the deficit for this year will be $1.1 trillion. I think it's the first time in history that the American people have finally woken up and realized that that money is going on their credit card and that they'll have to pay it off over the future, and hopefully that can be stopped.

Employment is certainly worse than anybody forecast, and the government's reporting of the percentage of out-of-work people is still very high, and likely it's really higher than that considering the underemployed and those who have stopped looking for work.

All the money being spent by the government, little of that money is being aimed at small businesses. Another initiative was announced by the administration. Hopefully, that will work. But the problem, of course, is that small business creates about 80% of all the jobs, and this new spending has missed many of the opportunities to stimulate the small business area.

The Congress and administration say they're going to help small business and they have announced new programs, but they almost never do and we're hopeful this time that there will be an impact there.

In many other ways, though, the U.S. economy is still resilient. It's coming out of the recovery slowly. It's amazing how the last three quarters, ending December 31, have not grown much at all. It's been just stymied by so many things that are out there. And I know it's got to be a while before we see those problems go away.

Entrepreneurs in many of the small businesses that we own and don't own, for that matter, are very savvy managers. They've kept their costs low, and we're lucky to have so many of them in our portfolio.

I still believe the bottom of the recession has been hit, that we're not going to go down from here. It's just a matter of how slow we come out of all of these problems that we're in, and I believe that over the next year we should be okay.

The distributions declared by the Board of Directors in January was $0.05 per month for January, February, and March, and this is a run rate of $0.60 a year. The Board next meets in April to consider and vote upon the April, May, June dividends.

We're up 25% this year. At this distribution rate, with the stock price at about $8.29 as it closed yesterday, this is a wonderful high yield for a great Company with a lot of potential. I hope we can pay an extra dividend or increase the dividend in the next fiscal year. I think that's one of the things that we're all looking at right now.

Now please go to our website and sign up for e-mail notification service. We don't send out junk mail, just news about your company. Go to www.GladstoneInvestment.com. That's the site, and you can follow was on Twitter under the name of GladstoneComps and also find us on Facebook under the word The Gladstone Companies. Many ways to follow your Company.

In summary, folks, as we summarize here, as far as we can see over the next six months or so, everything looks okay. We can only see a couple of quarters out. Nobody can forecast the future beyond that.

We are stewards of your money, as we say every time. We're looking for new investments, and I think we'll land a couple before the end of June 30 this year. Well, let's just stop here and have some questions from some of the analysts and loyal shareholders out there. So, please come on, operator, and tell them how to do that.

(Operator Instructions). JT Rogers, Janney Montgomery Scott.

Thank you. Good morning, David. We had another strong quarter of portfolio appreciation, I guess, particularly in the equity of Mitchell Rubber and Tread Corp. Would you all expect another -- to see another exit sometime in the near future?

I don't think there's anything on the horizon that we want to sell right now. As you know, our goal many times is to hold onto these deals, and we don't really see selling any of them in the near term. It may happen, but it's not something we're currently working on. So I would say don't look for any certainly in the next six months or year.

Okay, great. And then, you touched on the number of opportunities out there a little bit. I was wondering if you could talk about how the pipeline looks now versus in the prior quarter.

And then, also, I was just wondering if you could talk about the competitive environment. What does the supply of junior capital look like? And then, on the buyout side, are you seeing any competition from strategic buyers?

Dave Dullum is in a position to do that. He's just back from a trip, so go ahead, Dave.

Sure, JT. A lot of questions in there. I'd say on a global level, as I mentioned, the pipeline, the flow of deals, let's say, is good, we think, and what we're hearing from certain investment bankers and other guys involved in the M&A side is that over this next year it ought to increase. So we're looking for that.

I'd say that the one area -- and I mentioned as well, that we really look carefully at, obviously, is valuations. So if there's one thing I'd say, the valuations seem to us in some cases a little bit on the high end, and we're not going to push the envelope from our side. So if we don't feel really good about it -- I mentioned risk/reward, we're probably not going to be a player.

And there is competition certainly in the junior debt category, as you mentioned, and clearly from our end we're competing more where we can combine the junior debt with our equity, and that's a differentiator, frankly. So you'll find the sorts of deals that we're going to be really competitive in. We keep working hard on other Channel Technology types where our equity has a meaningful part in that particular transaction and we think of it from that perspective.

So all in all, I'd say certainly the outlook is good. We're going to keep working hard, keep finding the deal opportunities, but we've really ramped up that effort. So, again, we think we should have a fairly decent year over the next 12 months.

Another question, JT?

No, that's it. Thanks for getting my questions.

Okay.

David West, Davenport & Company.

Good morning. I was wondering if -- you've done the short-term borrowings at quarter-ends for the asset diversification test. That dollar amount was up this quarter. Was there any particular reason for that?

Dave Watson.

Sure, David. It was up because we put on a lot of new large deals over the past year, but we actually believe we're getting closer to the inflection point of being able to reduce the amount of T-bills going forward.

For example, if we were to put another $50 million of non-qualifying assets onto our books, we actually would've been able to reduce the amount of T-bills we bought this quarter by $15 million. Conversely, if we had put another $50 million of qualifying assets on our books, we actually would only had to have purchased $15 million in T-bills.

So, we're getting critical mass from a size standpoint in our portfolio, which is resulting in a lot more of our portfolio companies becoming qualified versus being non-qualified from a 5% size standpoint, so we feel like we're at a high water mark and hope to see the amount of T-bills that we purchase at each quarter-end to reduce over the next year.

Great. Thanks for that color.

You have a follow-up question, Dave?

Yes. Just turning to the borrowing side of things, great achievement now to get your line of credit extended at a great rate. Your borrowing levels currently are very modest. You clearly have room for further leverage.

Is there a point, assuming that you don't get the other sources of longer-term financing that you discussed, that you would -- that you start to consider options like a common equity if borrowings, say, reached 50% or more of current net assets?

There's a lot of ways to solve that problem, as you just brought up. First of all, if we can get additional members to the borrowing of the short-term, we can raise that on up.

As you know in our other fund, we were up around $137 million. So, if we could move this one up to $100 million or $150 million, as I think we may be able to do, we don't need as much current borrowings as you're indicating.

But the problem here is that both of those lines, whether in this Company or in the other, are short-term, and we always want to get into the long-term.

So the question for us is, should we go ahead and find some long-term borrowing now? We are working with one lender -- I don't know if it will come through or not -- who has indicated that they will lend to us, and there's always the possibility of doing some term preferred stock or some regular preferred stock before we get to the common stock.

We always hate to do common stock at this price, simply because it's dilutive to our existing shareholders and the goal here is to increase the dividend to the common shareholder. So, sometimes we can borrow money at a cheaper rate or do a preferred stock at a cheaper rate when that becomes accretive, meaning we can increase the amount of money going to the common shareholders.

So we play that game and we analyze it probably once a week. We sort of run it through our model to determine which is best for common shareholders, and I don't have a decision for you today, but look over the next six months or so that we will have to make a decision.

Just as one follow-up to those comments, is the long-term lender you mentioned, is that like an insurance company?

It's a good long-term lender. I'd rather not categorize them because I think they would -- you might know who they are if we categorize them.

Okay, very good. Thanks so much.

You're welcome.

By the way, just to follow up on Dave West, the borrowing of the $85 million is done over a three-, four-, five-day period, so it has very little impact on the earnings power. It just allows us to qualify under some regulations that the IRS has.

Do we have any other questions?

(Operator Instructions). JT Rogers, Janney Montgomery Scott.

Hi, David, just another question. Saw the weighted average credit quality fell during the quarter. I was wondering what drove that.

And then, just a follow-up, I saw, I guess, CCE restructured partially on the fair value. It was written down to zero. I was wondering if you could give some detail on what's going on there.

David Watson is going to handle that one.

Sure, JT. I'll discuss the credit quality and Dave Dullum will talk to you a little bit -- will give you a little color on CCE.

On the credit quality on our loan ratings, a major component of those is the duration of our securities. So, the farther out the maturity date is, the lower our risk rating goes, based on the risk of time.

So since October of 2010, we've put $114 million of new deals on our books that generally have a maturity date of five years or more. So even though they're new investments and are performing as expected, our risk rating system penalizes them based on their maturity date being way down the road.

Another example is Acme, which is performing really well, but we just extended the maturity date out three years during this current quarter and its risk rating decreased four points based off of just the extension of the maturity date.

So, we feel good about the quality of our portfolio and don't believe a drop of 10% in our loan ratings at this time is really indicative of current credit quality, but it's more reflective of just us having a younger portfolio at this time.

Okay, that helps a lot. Thanks.

JT, just briefly if you want me to touch on CCE, what we did there, as I think I mentioned on our last call, the company had -- as a lot of companies in the economy and in particular around the golf industry, there was clearly a drop-off, if you will, in demand.

Although they stayed very, very high, relatively speaking, because they have a fairly unique niche in the New England area, there was some margin compression, frankly. So as a result of that, their EBITDA, while it was still positive and good relative to where we bought the company, it was clearly off.

So what we did, frankly, were a couple of things. One, we strengthened the executive management approach to the business, which is a positive. That's one. And two, we actually did do some restructuring of their balance sheet, which meant really that we converted some of our debt to a preferred stock and we took some additional preferred stock for some interest accrued, et cetera. So we restructured the balance sheet just to give the company more flexibility.

It's got positive cash flow, and we structured the debt also where we expected to be able to toggle back over time. So, it's one of those that we're just working through the businesses. It's actually performing well. It's picking up. Things are going better, so I think over time we'll see it get back to where it needs to be.

So the zero, if you will, was more a function of the overall enterprise value, the way we do it certainly being not high enough, if you will, to cover all the debt. So all in all, though, we feel good about the business and it just had the impact in that quarter.

Okay, great. And I think you've talked about this before. Do they still have that irrational competitor out there negatively affecting pricing?

Great question. What we actually have found is, and as we go into this new year, of course, it tends to be seasonal business, we are actually winning more than we're losing and actually have had some pretty good wins.

And what we've found is they can only be rational so long, and plus we frankly have gotten much better support from our manufacturer, which happens to be Club Car, which is a main competitor to the irrational competitor, and as a result of that, frankly it's helping.

So I'd say we've got a good team effort going there now, and as we go into the new year I think we're going to end up improving our market share again, relative to where we were before.

Great. Thanks, again, for taking all my questions.

Absolutely. Thank you.

And just to end, JT had asked about selling businesses. That's one way that we can get additional income is when we sell them.

Another way, of course, and it happens quite frequently in larger companies, is they do a dividend recap, as they call it, in which the company borrows money and pays a dividend out to shareholders, and management usually gets a bonus as part of that. So another way for us to cash in and not really sell our Company is to have a dividend recap.

And while we don't have any of those on the horizon, that's just another way to play the game of taking money out of very successful deals. Do we have any other questions?

Mr. Gladstone, at this time I'm showing no questions in the queue.

All right. That will end this conversation, and we look to talk to you again next quarter. Thank you all.

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