Gladstone Capital Corp (GLAD) 2005 Q3 法說會逐字稿

Sir, you may begin your conference.

Thank you, Esther. This is the Gladstone Capital quarterly call. This is David Gladstone on board, and since this is public I will have to read the obligatory warning about forward-looking statements. This report that I am about to give may include statements that may constitute forward-looking statements within the meaning of the Security Act of 1933 and the Security Act of 1934 including statements with regard to future performance of the Company. These forward-looking statements inherently involve certain risks and uncertainties even though they are based on the Company's current plans that we believe to be reasonable as of today.

There are many risk factors that may cause the Company's actual results to be materially different from any future results expressed or implied by these forward-looking statements including those factors listed under the caption "risk factors" in the Company's 10-K filings with the Securities and Exchange Commission. And by the way, this same filing can be found on our website at www.gladstonecapital.com. The Company undertakes on obligations to publicly or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

The quarter ending June 30, 2005 was an okay quarter for our Company, but we certainly have to do better than that. We had a good quarter in terms of loan closings, but the payoffs were high in the quarter. We invested about $35 million in new loan originations during the quarter to ten companies and our low production, we felt, was pretty good for the quarter. But during the quarter, we did receive full repayment on $12.5 million and, if you add to that the normal amortization, it was about $18 million so we only ended up with $17 million net. And, of course, that is just not good enough. We are going to have to do better than that in future quarters.

At the end of the quarter, we had about $198 million in investments on our books so that is a nice group of loans. We have invested now about $345 million since inception. We have had about 18 companies payoff. Average return on these exits have been around 18%. That seems to be pretty good since we are investing mostly in senior and second-lien loans and don't have any mezzanine or equity orientation.

Since June 30, we do have one loan now that is about 40 days past due for its July 1 payment but there is a refinancing on the horizon and we believe that will be paid current if not paid off. That is a small loan of about $3 million. So, not much to worry about. We have no losses to date and don't see any on the horizon, although if we took a small discount on some loan to get out of it, that might be good if we thought that something was going on so we are looking at that as well.

Right now, don't feel there is any need to change the strategy of the Company. We are going along at a good clip on terms of originations. Hopefully, the businesses will have less opportunity to payoff and pay early.

Balance sheet today is still very underutilized. We only have $54 million borrowed on our line of credit. As you know, we have a $100 million line there and they have indicated -- that is, the syndicate of banks have indicated they would increase it to much more than that. So, we have got plenty of room to grow since we have $154 million in equity. It is a very conservative balance sheet -- very strong.

Numbers for the quarter in June are fine. We anticipate that the quarter ending September will be performing well. Net investment income before appreciation, depreciation gains and losses -- we didn't have any losses so our gains -- but appreciation/depreciation for the for the quarter ending June 30 was about $4.4 million versus 4.7 million last -- the quarter a year ago. So, that difference has to do with the fact that we had some extra income in the prior quarter. Last year's quarter had -- I am trying to remember the exact number, but a good amount of extra income in it.

Net investment income for the quarter is about $0.38 per diluted share. And, here, we are always talking about weighted average, fully diluted common shares when we use the per-share numbers. So, we continue to grow, just need to put more loans on the books. For the nine months ending June 30, our net investment income was approximately $13.5 million versus 10.8 for the nine months last year. So, that is $1.16 per share of net investment income. That is the most important number because that is the number that measures closest to our tax return from which we pay our dividend. So, $1.16 is a good number for this point in the year.

Unrealized and realized gains -- we don't have any unrealized gains. We have some unrealized depreciation. This is a mixture number and, for some reason the accountants don't typically break that out. But, we had about $389,000 of depreciation for the 3 months. However, for the full 9 months, we had about $1 million of appreciation. All about the one company I mentioned -- well, all the companies as of the end of the quarter were paying as agreed. We do have this one $3 million loan that is behind as of today.

In terms of valuations --valuations we are very happy with. Standard & Poors -- they continue to be very conservative in their values that they set for our loans. They use this wonderful market test that they have of about 20,000 loans that they follow and they value our loans and so forth. The Board has been following their lead most of the time.

Bottom line -- now turn to net increase in shareholder's equity from operation. This term is a combination of net investment income and all appreciation and depreciation and for the nine months this number was $13.2 million versus 9.8 last year. So we are cruising along at a good pace today and $1.13 versus $0.95 last year. So, that is a 13% increase and -- good 9 months, could be better.

Wonderful thing about the earnings is that the paid-in-kind interest is declining. We have only had about $65,000 for the quarter in paid-in-kind. That is the interest that is accruing but not paid because it is not due until the note is paid. I am hoping to reduce that further if we can get a couple of these older loans paid off in the next year. That will eliminate all of our original interest discount. And so, the money that we get in from our interest payments will be the money that we have available to pay dividends and there won't be any phantom income, either from original-issue discount or from paid-in-kind if we just keep working down those older loans that we had on the books.

Loan ratings - our loan ratings remained relatively unchanged. The risk rating system that we use to -- that is set out in the Q went from 7.2 down to 7.1. That is almost a non-movement. So, the system that we use to rate our loans is continuing to stay relatively stable and steady and we are quiet happy with the portfolio as it sits today.

The marketplace since I last talked to you -- senior loans and second-lien and sub-debt marketplace for large, middle-market companies -- that is the larger end that we look at -- is still just crazy. It has plenty of money flowing into it that have driven rates down. Companies that is are getting ratings from the rating agencies continue to get very low-cost financing. Senior syndicated loans of 200 million or larger continue to be strong at about 2 to 3% over LIBOR -- more like 2.5% over LIBOR -- LIBOR being London Interbank Rate,which is recognized as the leading indicator of short-term rates.

LIBOR is now about 3.5%, so when you add the 2.5% that they are paying -- these larger, middle-market companies that is paying -- they are borrowing at about a 6% rate. That is still very cheap money. I don't think that is going to last. If you look at what the Fed is doing and you look at what is going on in the marketplace I think that will continue to move up and so businesses will start paying 7, 8, 9% for their financing which will be in line with historical averages.

On the other hand the marketplace for small-company loans, the ones that we also participate in, continue to be quite good for us. Syndicated-loans marketplace has gone crazy of course but the other end of the marketplace still -- the 5 to $15 million pieces are quite nice. We see a little bit of demand increasing there, not a lot. But, I think over the next 12 months it will continue to grow. Small loans tend to have more risks so bank lenders aren't there.

The asset-based lenders will come into the marketplace when there is plenty of assets but on the cash-flow loans they are not there. So, we end up competing with the mezzanine-loan funds and some smaller BDCs and some small SBICs out there and our pipeline of requests continue to get stronger as we continue to branch out. We have brought on 2 more people --we are not quite ready to announce them -- in two different cities. And, we think that will increase our growth in the number of loans and investments that we see.

I do want to say that the pipeline is strong. There is plenty of opportunities, but we are very picky and we are not going to alter our standards to make our loan production better. We are going to continue to hold to our criteria. Our goal is to be the strong profitable company, not necessarily the biggest company.

We are still mostly doing variable-rate loans and staying away from fixed-rate loans. We like variable-rate loans in this interest-rate-increasing environment. As I have mentioned before, we put interest rate caps in place to cover our fixed-rate loans so we are covered there. This is sometimes called a derivative and it shows up on our income statement. But our fixed-rate loans are capped with this interest rate cap so we are not too worried about them in an interest rate environment that is rising. We just hope that the Fed doesn't kill the economy by raising rates too quickly or too much.

We continue to worry about the oil prices. The ripple effect is pretty dramatic in some companies. Other commodities are also continuing to come up, and so there is a bit of inflation in the air from those two. The amount of money that the government is spending in Iraq is also hurting and, certainly, the crazy pork-barrel spending that the federal and state governments are using these days is very worrisome. These last two bills that came through, the Energy Bill and the Transportation Bill, were just loaded with pork for various Congressional districts and, from my perspective, was quiet irresponsible on the part of our federal government. But, that seems to be the hallmark of what they are doing these days on Capital Hill.

Trade deficit also worries us a lot. China currency devaluation was really a joke and China continues to subsidize their industries to the disadvantage of small businesses in America. It really hurts some small businesses. We have seen one of our businesses get hurt from some of the Chinese cheap products that are coming in. We see in the newspaper today, or yesterday, I saw an article saying that large retail giants are lobbying Congress very hard to act in favor of China and not pressure China as much. And, I am sure that is something in favor of the retail giants.

They get about 80% of their products from China and the Asia marketplace so anything that hurts China is going to hurt them. And so, they are out there paying congressmen and senators a great deal of money to protect their interest. I just hope that our congressmen and women get some backbone and don't fall into that line of reasoning. and will get out there and help strengthen the U.S. economy by keeping the Chinese at bay with all of their subsidies that they are giving.

In spite of all those worries that we have, the industrial base of the U.S. continues to get stronger. The last quarter was perhaps the strongest one we have seen in a very long time. Small businesses have kept their costs low. They have maintained their lean approach to things. Profits continue to improve. Manufacturing operations are not at full capacity but they continue to grow. They are hiring people. We see great backlogs in some of the companies that we are looking at, and I am beginning to believe that not only will 2005 continue to be strong but 2006 is certainly going to be a strong starter. Whether it ends that way or not, I guess, is yet to be forecast. But, we are very bullish about what is going on in the economy today even though we have a lot of worries about interest rates and all the short-term things that are going on.

I hope everybody sees that this inverted yield curve that we keep talking about is really being created in -- some say manipulated by -- the government. So, the Fed's increasing the short-term rates is really an artificially increased yield and that inverted yield curve is being made possible by government policy, not by a recession coming on. We don't see a recession out there right now and, as a result, that is why we have been relatively bullish compared to prior statements.

We are going to put our shelf registration back in, and may need to raise a little more money next year so we are getting the shelf registration ready for capital. And, you will see that coming through and we have also begun work, as we reported last time, and continue to move forward on our securitization. So, we are looking at that as well. I think that should come toward the end of the year.

We are applying to the SEC and you will see it come out somewhat -- well probably, I think it was filed last night, so you will probably see it in the near-term. We are asking shareholders to approve a change in our investment advisory agreement from one that promotes stock options as a reward for management into a performance-based fee. Most of the business development companies like us are now on a performance-based contract without stock options. So, as most of you know, the entire private equity world is that way.

For us, we are going to go to shareholders and ask them to change us from a compensation system based on stock options to a performance-based contract and that should go out to shareholders hopefully in the next couple of months. And, converting to a performance-based system will also help us attract good people. Most of the places that we go to to hire people, the private equity funds, are all on that basis so we need to be on that basis as well in order to attract the best people.

Please go to our website and sign up for our e-mail notification. It is there and easy to sign up and i hope you all will do that. We won't bombard you with a lot of junk mail.

In summary, 2005 is going to shape up as a good year for us. We did increase the monthly dividend, as you know, from 13 to 13.5%. That was 3.8. That has got us at a run rate now of $1.62. So for the year, we have increased it over last year, we were at $0.12 per month. We are now at $0.135. So, we have raised the dividend by $.125 for this year. Our year end, of course, is September 30 so that is the amount that we have raised it for this year.

Those of you who purchased your stock, as I did, on the offering are now getting a 10.8% return and the stock has gone up to about 24. I am excited about increasing the dividends. As most of you know, I make more money out of the dividends than I do as my salary in the management company. I still have a salary of $200,000 a year which is what I started out with back then. I haven't increased it. There is no bonus, so that is my salary. So, I look at the dividend as the way to make my money so we are all on the same page. Someone joked the other day that I was making twice as as much as Warren Buffet in terms of his salary is only 100,000 a year. So, we are going to let that stand and maybe Warren will catch up with me in a few years.

We also have a new head of investor relations. Kelly Sergeant is on board, so if you have questions please call Kelly. She is beginning to bring our website up to terms. As you know, our website is mostly for investors, so she is going to continue to bring that up to par. Her number by the way, if you want to call her, is (703)287-5835. I would be delighted to have you introduce yourself to Kelly. Those of you that are fans and call regularly, she is now your contact. And also, one mistake in the press release. It looked like we had demoted Chip. He is continuing to be President of the Company rather than EVP. That was my fault. I should have caught that when it was circulated around, but he is still in that position.

Also note that we have signed up two more Managing Directors. These are pros that have been in the business for a good number of years. They are coming on board. We haven't quite readied a press release on that. But, there are two folks coming in, both of them located outside of McLean -- so, in smaller cities where they can pick up some of the good small deals out there. So, we continue to build that base. We have two more analysts on board since we last talked, so continuing to grow the base at our own pace here.

Summary again. I feel good about increasing the dividend again in the fiscal that begins October 1,2005. I think we can do that again next year and I feel very good about finishing up this year. At this point, we will stop and take questions. So, if the operator will come back on and lead us through that, that would be great.

[OPERATOR INSTRUCTIONS] We do have a question, sir, and that question is coming from Jason Stewart, Friedman Billings

Good morning David. How are you?

Good morning, Jason.

I had two questions. One was on the early payoff. That seems to be the topic du jour. Aside from steady increases in rates, what do you think could cause that activity to subside?

Well, there is a lot of money out there in terms of the hedge funds and when we play in these larger transactions and do second-liens in these larger transactions, what happens is that the hedge funds come in and convince the company they can increase their senior line by enough to take out the second-lien line and there have been those refinancings. As we continue to rely less on these middle-market, larger second-lien transactions, as I think we will over time, that will subside. But, I don't see anything on the horizon that is going to stop that for most people that are playing in that marketplace. I think we all see that.

It has happened at a lot quicker pace than we anticipated. Normally, we think the maturity of five years on a second-lien is going to last maybe two years before they refinance given the strength of those companies that we are investing in. But, it has happened in a year in some cases and in some -- and, in one case, in six months. So, there is a lot of money sloshing around at the senior-loan level, and it is just going to continue to cause the second-lien people to get taken out earlier then they expected.

Okay, and then on the securitization that you mentioned, I know a while back you had been considering or thinking about being able to execute a securitization as an off-balance sheet transaction. Is there any progress on that, or have you gone back to just doing the traditional on-balance sheet securitization?

No, we still plan, Jason, to go off-balance sheet.

Excellent. Okay thanks a lot.

Next question, please.

-- comes from (Lee Carter), Oppenheimer.

Good morning, David.

Good morning, Lee.

Nice to see you. I listened to you yesterday and today.

Good. You get one more next week when we do the other one. We haven't announced the date, but it will be soon. How is the weather in Grand Rapids?

Rainy, but nice. We needed the rain. Anyway David, on the reinvestment of dividends, does that come out of the new stock or is that bought in the open marketplace?

Right now, most of it is bought in the open marketplace for the simple reason that most of the brokerage houses now handle their own dividend reinvestment. They don't really come back to the company. We thought about offering a small discount, which would then mean that we can issue all the stock through our Company because the brokerage houses won't want to pay that discount.

But right now, it is all being bought in the marketplace. So, we haven't tapped into that. I know a couple of the other BDCs are offering discounts so that they can have that money reinvested. We haven't gone that right yet, but maybe we should.

I can see the difference on how you are one -to-ten rating. You are a little higher on GOOD than you are on GLAD. Where would the new company generally come in? Is that going to be a little faster growth -- possibility?

Well, I think we will faster grow simply because we have announced that we are going to do a pile of senior loans in that to get us off the ground. I am not sure it is going to be any faster growing in terms of the buyout piece of that transaction, but I think we will get the money invested and get our dividend growing a lot faster in that company than we did in either one of the last two.

Okay. Anyway, now we have three solid years making three silk purses. Appreciate it.

Thank you for the compliment. Next question?

Our next question comes from Henry (Casulli).

Good morning, Henry. What you got as a question?

No, Casulli. I guess that is the sow's ear. Obviously, you are still very cautious about trends in the senior-loan market but it was interesting during some of the GOOD-GAIN-GLAD discussions -- you characterized Gladstone as more of a finance company whereas GAIN you had more as a buyout fund. Is there is a product opportunity that could develop out there in the more-senior-loan market where maybe we would see less risk, less yields and more leveraging opportunities for the company?

Yes, we are going to to wait until we do our first securitization before we make that decision. If we get this all done right, and it is always ticklish when you do these the first time, although we are not the first to do it off-balance sheet and we are not even the first BDC to do it off-balance sheet. Doing it for us -- the first time through has to be absolutely perfect, working with the accountants and lawyers.

Once we do, that we will come back and look at the senior-loan marketplace and look at the spreads that we can achieve, And, should those spreads be reasonable enough and we think we can leverage up big enough, then I think we will take a second look at that. A good proxy is Capital Source. They have done a great job in securitization of senior loans. And, they have been pretty careful, though, not to go into the senior loans that are the 250-over-LIBOR kind of things, and they have pushed more into the, I will say the smaller senior loans. And, I think we can do the same thing. I just want to make sure it is right before we head out into that direction.

Great, thank you.

Next question.

Our next question comes from Joel Houck, Wachovia Securities.

Good morning, David. How are you?

Good morning, Joel.

I am just wondering looking at what you kind of described as lower growth than what you would like given your penchant for maintaining good credit quality. Are you concerned that deals in the marketplace from a credit quality perspective -- I mean, I heard your comments about pricing but -- or, is it just simply a matter of you are only going to grow so fast in any given quarter or year?

No, we are concerned about credit quality because we think some of the leveraging techniques that are being used out there in the middle marketplace are, quite frankly, absurd. When you see somebody leveraging a company at 5.5 to 6 times and paying 9 to 12 times for it, it is a bit of insanity in the marketplace. And, it reminds me of what went on in 1987, '88, '89 before the big crash, of people doing stupid things with regard to leverage.

Some of these leveraged companies are very cyclical and they are leveraging them during good times and you can imagine what it is going to look like when the downturn comes. Fortunate for them, rates have remained low and the cycle has remained up and strong so it is conceivable that this bet that they are making could be fine -- that the company could generate enough cash during the next 18 months to 2 years to pay down the debt to a more reasonable level. But, it is not a bet that I like to make. So, we have remained in the same old mode that we have been in forever and that is holding to our credit quality and trying to maintain some semblance of rationality during these crazy times.

Any other questions Joel?

No, thanks David. That does it.

Other questions? Esther, you got any more questions?

Yes, sir. Our next question comes from Brad (Gulden), CRC.

Hello, David. In terms of credit quality -- really have to commend you for -- it took me some time to look for the non-accruals in your filing yesterday which I never found because, unlike some of your larger competitors, there aren't any. And, that appears to be getting worse with them. My question is really about collateralization. It appears, given the dividend yield which has drifted lower as the strong price has naturally drifted higher, that from these more-leverage, not a true-sale or off-balance sheet structure -- can you reconcile those two, now that the dividend yield is in the sixes trying to get more -- generate more income.

Yes, we are going to leverage up. We are constrained by law to one-to-one on-balance sheet leverage. And, that is why, I think, the question was about off-balance sheet. We do plan to go off-balance sheet. It is a little harder to make that case. A lot of people have said it is difficult to do and I agree with that. But I think for us, since we are doing more senior loans it will not be that hard for us to get it done and we will. The problem here Brad, just so you know, is that when you do them off-balance sheet you are restricted in how you can manage them once they are off-balance sheet.

You have a limited ability to go in and fix things. They are supposed to sit there like credit card quality kinds of things and pay off over time. And, that is a little bit harder to accept in our world where we play an active role with management. But, we have worked out conditions in our loan agreements as well as in our relationship with our Deutsche Bank who is handling our securitization. And, I think it is going to work just fine.

So, for us, we must get off-balance sheet if we want to go beyond one-to-one which I think we will. And we do plan to go to, perhaps, two-to-one. I am not sure how far beyond that we will go. But, most of the finance companies are up around three-, four-, five-to-one and it wouldn't be uncommon if we went into senior debt, as Henry Coffey mentioned, to move on up into higher leverage as well. Again, it is all about spread. It is all about much money you can make -- your return on equity depending on your leverage and how good the credit quality is. And, I think we have demonstrated that we understand credit quality. Now, we have to show you that we can leverage up.

But, you still have a lot of, shall we say, dry powder in terms of the ability to invest.

That is right. We are currently at 50 some million dollars drawn down from our bank. Our bank will lend us up to, probably, $150 million which is what our equity base is. So, you can say that we have got about $100 million worth of running room.

Also if we need to and haven't securitized by the time we get there, it would be relatively easy for us to go out and do a 25 to $50 million overnight equity raise and then increase our debt it from 150 to $200 million and continue the growth. So, we are not dependent on securitization to grow but it sure would be nice to go ahead and get one of these done and get it done off-balance sheet to demonstrate that we can make that work.

Okay, because I see the issue more on the investing side than on on the leverage side or the equity-raise side. Both seem somewhat premature to me.

It is premature. We aren't planning to do this until we reach the limits of our ability to leverage inside of this business. So until we reach the $150 million range, it would be silly for us to do a securitization.

Okay, great. That is what I was curious about. Thank you very much.

Okay. Next question, please.

Our next question comes from (Fen Getta), UBS.

Hello. I apologize. I missed this in the beginning. What was the repayment just for this quarter alone?

We had prepayments of about $12.5 million and then the regular amortization brought that up to $18 million, 18.1 million.

Okay, thank you.

Next question.

Our final question comes from Jon Maier, UBS.

Jon, what you got?

Mr. Maier your line is open.

You have any other questions. Looks like he is not there, Esther.

That is our final question sir.

All right. Anybody else, last question? All right, here --

I am sorry. We do have several more questions -- Rick Shane at Jefferies.

Hello, this is (Rohit). I am actually just in for Rick Shane today. I have a question about -- could have you maybe give a little more detail about the unrealized depreciation item this quarter -- maybe which company it was or just any more detail?

Yes, I think most of it came from this one $3 million loan that we decided needed to be taken down just because they were a slow pay. It is a $3 million loan. They are late on their payment. They are about ready to restructure and new money will come in, so I am not really worried about it. And, I think all of that depreciation will probably come back through once it is refinanced. But, that was the -- I think that was the main thing for this quarter.

Great, thank you. One other quick question. Do you have any kind of update on how business has been from the end of the second quarter through today -- just sort of the pace of originations or anything like that?

No, the pace of originations has been relatively good for us as the size that we are. 35 or so million dollars is a good quarter in terms of originations. What I would like to see is less prepayments or more originations. As I mentioned somewhere in the presentation, we have brought on another couple of Managing Directors who will help to generate more loan volume for us and they are geared up to go out and put loans and investments on the books.

So, my hope is that we will both increase the originations and, hopefully, the pace of repayments will go on. But, we are not in control of repayments. We get nice prepayment penalties on some of them. So at this point of time, it is kind of put the loans on the books, hold your breath, and hope they don't repay.

All right thanks a lot.

Next question. Do we have one more question? Esther do you have anybody on the line?

Oh, my gosh.

Who is that?

Can you hear me, David?

I can. Go ahead.

That is amazing. It is an open line. This is (Ajan Day). I had a question, if I may. I read some comments from some economists -- economic analysts -- saying that U.S. business was starting to pull in their horns, becoming less bullish starting, to take fewer risks because of the squeezing margins. Are you seeing that at all?

Not at all. In fact, it is just the opposite. We do see all of our small businesses that we are talking to and working with -- they have learned their lesson from the last recession and they are running lean. There is not this wild abandon of hire people here and there and hope you get them in place and that kind of thing going on.

So, they are running their operations relatively lean. And, I think in all but a few cases we have seen very strong backlogs and good opportunities. But, I don't know where this economy -- economist is getting his statistics, but we have not seen that in our portfolio or the people that we are investigating when we are looking into deals. I am not seeing that today.

They did mention the NFIB survey. Maybe that is smaller business than you look at. I don't know.

You know, these surveys -- it depends on which day of the week that you catch the young man or woman that is running the business and what they feel like that day. If they just got beat out of a big contract, they are probably pretty sad and give you a negative. If they have just won something, they are very positive. But, on whole we are seeing good increases and good strength in the small business marketplace.

Good. Yes, if you got me today you would get a negative response. My website has just been hacked into by some Islamic fascists so I am not in a good mood about anything.

I am sorry to hear. We haven't had that problem yet on our websites but, given that we have three or four up now, we are probably going to get it one day.

Well, good luck.

Anybody else have a question?

Our final question is from (Elliott Burke), Millennium Partners.

Today, it has obviously been well documented -- the frogginess in the market and you have talked about it for a while -- but I am curious. In terms of the way that it has changed over the last few quarters, do you find that getting worse? Was there is a bit of a pullback at all in that following kind of the temporary credit crunch you had following the GM downgrades? I mean, I am just a little bit curious whether that has changed quarter-over-quarter at all, and what kind of multiples you are seeing on the investments that you are doing right now?

In terms of what we have seen, we saw a little bit of drawback in the early spring but there has been no let up since then. The hedge funds are probably buying 70 to 80% of all the syndicated loans that are out there today and there has been no end of the money coming into the hedge funds. Now, as the equity markets continue to get stronger as they have over the last year, some of that money is going to leave the debt market and go to the equity market because they need the higher returns. And so, that will put some crimp in the demand side of it. But right now, a senior loan coming out from a good company that is raising two, three, even a billion dollars is oversubscribed two- or three-to-one. So, there is a huge amount of money in the senior debt marketplace.

The second-lien marketplace, which we participate in, is relatively strong. It is not nearly as oversubscribed as that. But, depending on the deal, it can be and therein lies the problem for us in that we buy into these and then see, within a year or so, the company getting stronger and, as a result of that strength, getting repaid by increasing the senior loan.

There will be a point in time when that marketplace cracks. I am not sure when it is going to be. It will be good for us when it cracks because it will give us more opportunity than we have today in the senior-loan marketplace.

On the small end of the line, there just isn't that kind of frothiness down there today. It is more a question of what are you willing to lend in terms of the ratio to assets and ratio to earnings. And in the second-lien or sort of subordinated-debt area, we are seeing most of them go around at three and a half, four times earnings. That is a good number. We can live within that one quiet nicely. When they move up into the five and six times, we just aren't interested in that for these small businesses.

I am also curious in terms of the second-lien market. There has been some conversation recently upon how are those are going to -- and, I know you have had a nearly spotless record when it comes to credit, but there has been some talk of the kind of problems that could occur down the line when some of these companies -- if some of these companies have to reorganize the kind of subordination that is involved in a second-lien loan. Do have you any thoughts about that? It doesn't sound like you have -- I guess it depends company to company of course -- but, I am curious what your thoughts on there -- if you are participating heavily in that marketplace right now?

Well, we are not heavily in it. We are in it in a good way. The second-lien marketplace in the syndications has certain legal language and we always -- in fact, we have turned down opportunities in which the language wasn't to our liking. And, pretty much, in bankruptcy the senior and second-lien are treated similarly in the bankruptcy except that the second-lien obviously gets paid second to the senior.

When we do our analysis, our belief is that if the business were in bankruptcy we would be okay in a second-lien position in the ones that we are going into. There are plenty that we turn down that we don't think, in bankruptcy, you'd have a problem. These Companies, because of their size are rarely, and I would almost say never, going to be liquidated. That is just liquidation pure and simple. So, that is not a question. The question is how are you going to fare in bankruptcy. And, we do that analysis to make sure we think we are going to fare pretty well in any kind of reorg.

So, it is all in the legal documents. We hope that we are right, of course. We haven't had any hit the wall yet, don't have any ready to hit the wall. So, at this point in time, it is an untested theory.

Okay, thanks very much.

I am showing no further questions at this time.

All right. Thank you very much. We appreciate all of you being online and we will see you next quarter.

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