Gladstone Capital Corp (GLAD) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gladstone Capital earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to introduce your host for today's conference, Mr. David Gladstone.

Thank you, Mary. This is the conference call for our year-end as well, and this presentation includes a number of forward-looking statements. As you all know by their nature, these statements involve numerous assumptions, and the risk exists that these statements may not be fulfilled. So we caution all you listeners to this presentation not to place reliance on these forward-looking statements as a number of factors could cause the future company results to differ materially from these statements.

Please take a look at the 10-K that we just filed yesterday. They have all the risk factors in them that you should be considering if you are thinking about buying some stock.

Comments on the year, let's talk about that. It was a reasonable year considering the terrible economic climate we waded through during most of the year. The industrial sector, which we spend a lot of time looking at, was probably the thickness of all the pieces of the economy. For that reason, I think we turned in mediocre results. In terms of loan closings, we had about $42-43 million of new loans, but net we are only up about 30 because we had a number of paydowns. People like Kozy Shack paid down in that quarter to a relatively low amount. We had ARI that paid off, and then at end of the quarter, they did a refinancing and we went back in in a small amount of $5 million.

But all-in-all we had $10.4 million at last year's year-end and investment income that increased to about 15.1 this year just ended. Net investment income went from 7.6 to 11.3, and we only had about $200,000 worth of depreciation. So we were able to move it from 75 cents, which was a low number to begin with, to 109, which is not where I wanted to be, but given the economy, that is the nature of the beast.

Comments on the three months ending September '03, we were up a little bit. Net investment income from 3.7 to 4, about an 8 percent increase. Net investment income, which is what we paid dividends from, moved from 2.78 million to 2.85, not very strong, about a 2 percent. The depreciation at the end of the year about $220,000 brought us down to about 2.6 million or 26 cents a share for the quarter. Not good at all, but that is what it is.

Current quarter ending December 31st, 2003 off to a relatively slow start, but we have watched the M&A marketplace literally explode, and we are seeing any number of good deals today -- probably the most activity we have seen since we started the Company in '01. What I mean by activity here, we have always seen lots of deals, but we are seeing requests now from companies that have shown some growth during the year and have what we consider reasonably good prospects. So while we think this quarter is going to be okay, we are really expecting the quarter ending March and certainly June and September to be stellar quarters.

Closing this quarter, it will probably reach about 25 million if we close the two loans we are working on. We have closed one, of course, and a number of things happened in the quarter. Some good, some bad. Bad news -- Kozy paid off completely, so those of you have been eating lots of rice pudding to help us out, can back off now. We have gotten that one paid off.

All the loans are paying as agreed. We got all our loan payments in this quarter. December 1st payments all came in on-time. We did settle in this quarter our riff with American Capital over Inca. The good news there is we settled the riff; the bad news is -- in some regards, it is bad -- they paid us down from 6 million to 2.5 million, so that loan is down to 2.5 million, and we have sort of moved up in the capital structure because the bank was paid down some as well.

So all-in-all, we are not so much worried about our portfolio company, although Marcal is still competing in an industry that has an enormous amount of overcapacity. So that is the only one on our watchlist. They are paying as agreed, but still all-in-all, it is still relatively overcapacity to industry, and you never want to be in that position, but that is where we are with that. I don't think our loan is in jeopardy in terms of losing any money or I would let you know, but at this point in time, that is on our worry list.

Other than that, the others seem to be coming along just fine, and the number of transactions in the pipeline seem to be increasing daily. We have all been just as busy as can be, working day and night on all of these new transactions that we are working on. Monthly dividends as you know in this new quarter we went to monthly dividends of 11 cents a month. We should be able to increase that during the year. I don't know by how much, but hopefully we will get that up and meet the street's expectations of our goals in that area.

Other than that, it has been a trying year, a difficult year. Our K is finally out, and our annual report will be sandwiched around the thing in some way, and we will mail that out to everybody. So glad to have that year over and hope we don't have any more like that. It was a reasonably good year in terms of increasing the dividend and increasing the earnings.

So with that, Mary, I won't hold back the tide of questions. Why don't we open it up for questions now?

(OPERATOR INSTRUCTIONS). Joel Houck, Wachovia Securities.

Can you just put a little more color on what it is that you are seeing today in terms of investment opportunities, or what you like about these opportunities, that perhaps the balance of the year turned you away from doing deals? I gather the pipeline has been okay. It is just really the orientation internally from Gladstone.

That is correct. During the year, we did not how much faith in a lot of the people who came in and showed us their projections. We are a lot more worried about it than perhaps some of the others, so we took a very cautious approach.

I don't know what happened in October, but October, the large capital marketplace, the debt capital marketplace, literally exploded. Since then, the amount of money that is rolling into the syndicated loan marketplace, as well as the high-yield or junk bond marketplace, has literally gone bananas. As a result of that tremendous change, transactions are occurring in the large capital marketplace at record paces. You have probably seen that yourself.

They are having billion dollar days in terms of inflow of capital into that marketplace. What happens is that when the big capital marketplace for LBOs goes off so does the smaller end of the marketplace begins to change dramatically as well. And you are watching these larger transactions go down now at six and seven times EBITDA, which is the high-end of the mark. They have been going at four and half or five times.

What happens when it moves to six or seven times times is that sellers who have been reluctant to sell at four or five times the EBITDA are now willing to sell their businesses, and the businesses also have reasonably good prospects. So the marketplace has dramatically picked up for us and for everybody else. I would not be surprised if this year isn't -- this year coming up, the '04 year -- isn't perhaps the largest volume EMA year and certainly since the late '80s when everything was going crazy, simply because there is just so much money on the sidelines in terms of equity. Now that the debt marketplace, at least the large end of the debt marketplace has come back, I think it is going to prove exceedingly lucrative for all of us.

Thanks.

Rick Shane, Jefferies & Co.

You know, again, can you just give us a little bit of context -- it certainly seems like your competitors have weighed back into the market a little bit more aggressively or a lot more aggressively than you have. Is there something structurally different in terms of the types of deals you are looking at, or is it really just your read on the market being different from their read on the market?

Well, I think it is the latter. No will know. Time will tell if they came in too quick or took over deals at the wrong time. I would say right now if you looked at it, the people who have been very aggressive in the marketplace over the last year, certainly maybe even two years, may have been right that now the marketplace has turned. I have always been one of those people who believe you should not expand aggressively in a downmarket, and I only did that once and got it handed back to me pretty badly.

So we took the cautious road, and that may have been the wrong one in terms of aggressive growth. We see our competitors or people that are in similar business as us are putting huge volumes on the books, and they may be exactly right. I would say if those businesses are now ready to take off and they guessed right, then in terms of they are ready to take off, then they have done the right thing by going out and putting the deals on the books last year.

Thank you.

(OPERATOR INSTRUCTIONS). Vernon Plack, BB&T Capital Markets.

Good morning. The mix of fixed and variable rate investments, what is that now?

Of the top of my head, I don't know. I know all the new deals we are doing are all priced at variables, so that will run down over time. I think we will publish that -- Harry, do we have that on a Website, how much is variable and fixed? Why don't we update that? I know we put in there last time, and it is in the Q someplace -- in the K some place, I just can't remember where. We are looking for it now, but, Vernon, do you have another question?

Also, it looked as though the weighted average yield for the portfolio dropped on the quarter. That may have just been the result of timing issues with investments being paid off. I assume that is the case, correct?

That is correct. We had Kozy pay down dramatically, which was a high-yielder, and ARI paid down -- paid off completely actually during the quarter ending September 30. Then they refinanced it with the guys at GE again, and GE had, as they call it, a last-out tranche that we took a piece of that. It was a little bit lower than the original one. So we had a period of time when ARI was not on the books, and then it came back on at a little lower rate. But we did not replace the Kozy one, so that is the amount that really caused the downturn.

That is all for me. Thanks.

In terms of fixed and variable, we have about 56 percent that is variable rate. We normally priced those, just so you know, we have floors. For example, we might have a floor that is 10 percent and a variable at like 7 over LIBOR. Something like that might be a way of pricing, although I don't know that any of our loans have that exact pricing. Okay?

Adrien Day (ph), Global Strategic Management.

I was just following up on that last question I guess. I was wondering about spreads, what you see happening to spreads over the next six to 12 months?

That is why we have gone to variable rate and not doing fixed rate anymore. I think those people who are pricing fixed rate will be squeezed. As you know, LIBOR is about 1.1, and traditionally LIBOR has been 4 or 5 over its last 10 or 15 years in its history. So if you looked at the averages and you said that at some point in time LIBOR is going to come back, I think many of those who have financed themselves on variable-rate and are doing fixed-rate, even if there are 10 or 12 percent or even 15, are going to have a squeeze in their profit margin as rates come up.

So we have decided to price most of our deals and I think all of them are priced now at variable. I don't think we have done any, and even the new ones we are pricing them all at variable. So that is the way we are doing it, and securitization will work much better for us when we get ready to securitize because variable rate loans are securitizable much better than fixed-rate.

Even if you're doing a variable, do you see the margins getting narrower?

I am sorry. No, I don't. What happens when the margins move is that all the senior debt and others move up by some amount. So I don't think there is going to be any big change in our marketplace.

It is conceivable that the senior debt marketplace could heat up and go from where they are 250-300 over LIBOR, down to 150 again. They got burned so bad out of the last heating pricing area that I don't think they will go back there. So from my standpoint, I don't think ours will get -- you may get some -- but not a lot.

(OPERATOR INSTRUCTIONS). David West, Davenport & Co.

Good morning. I was just wondering if you could comment a little bit in terms of your financing options in 2004? It sounds like with your greater optimism toward booking more business in the March and June quarters, you will finally need to use your credit facility and/or securitization. I was wondering if you could comment about your plans in that regard?

Yes. We have one loan closing hopefully next week. Then the next one after that, which is due shortly after, we will have to go into our line of credit, only because the way the line of credit works is that you can only have certain loans in it and certain amounts. So we are a little bit deficient, and we have put some larger loans in there, and they like diversification. So we will start working into our line of credit probably before year-end, if these two loans get closed, and certainly if only one of them gets closed, it will be early January. We have a $100 million line from CIBC and KeyBank, and they are chomping at the bit to lend us money at 1.5 over LIBOR. So it we can lend it 10 over or better, it would be quite nice to have that kind of spread.

I think also, David, one of the things that we have been thinking about is that if we get to the summertime and we're into this line very heavily and are getting ready to securitize, it will be a tough decision of whether to take down, let's say, another $20 or $30 million in-stock and make the securitization a much bigger transaction because bigger is better in the securitization world. So we will have that decision to make some time this summer as we go into the $100 million line of credit.

We do have time for one more question.

I am showing no further questions at this time.

Well, that is great. Last chance for a question. Anybody? All right. Well then, we are going to close-up our conference, and we certainly appreciate all of you. We wish you a Happy New Year and happy holidays, and hopefully we will have some good reports for you. Thanks very much. Goodbye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect and have a nice day.