Gladstone Capital Corp (GLAD) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Gladstone Capital first-quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Gladstone, Chairman of Gladstone Capital. Thank you. You may begin.

Well, hello, everybody, and good morning; and thank you, Diego, for that nice introduction. That was very professional. This is a quarterly conference call to shareholders and analysts for Gladstone Capital, trading symbol GLAD. We thank you all for calling in. We are certainly happy to talk with shareholders.

I would like to see some of you come by McLean, Virginia, and stop by and say hello. You have an open invitation. You'll see a great team at work. I think they're the best in the business.

I need to read a statement about forward-looking statements, so let me read that now. This report that I'm about to give 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. We believe those plans to be reasonable.

There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including those factors listed under the caption Risk Factors in our 10-K and 10-Qs as filed with the Securities and Exchange Commission. They can be found on our website as well, at www.gladstonecapital.com.

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.

Well, the quarter ending December 31, 2006, was a good quarter for our Company in terms of increasing our assets. We invested about $52 million in new loans and originations in about 20 companies. For us, this is a good amount of production for loans. However, during the quarter, we received repayments of about $24 million of loans, including normal amortization. So with these loan payoffs, which were heavy, the net new production was about $28 million.

After the close of the quarter, we made what I believe is about $47 million worth of new loans. We had a little bit of overlap there. We were paid about $14 million. So the net increase was about $33 million.

At the end of the quarter, our investment portfolio was valued at about $244.9 million; and our cost was about $244.5 million. Always good in a loan company like ours to have the value of the cost, even if it is only a little bit above the value. So the cost a little bit less than the total value.

Since inception, we have made 84 loans to 84 different companies. We have also exited about 44 companies. The average returns on the exits has been about 15%. At the end of the quarter, we had no loans past due. All payments are current. We are very grateful and we have such a good portfolio.

To date, all investments that we have had over the last 5.5 years, the IRR has been positive on each one of our loans.

This all leads us to say the same thing every time we talk about this, is that when we founded the Company we had a plan; and that plan has executed as we thought it would, and so we don't plan to make any changes in our strategy at this point in time. We could, of course, change our business model and make higher risk loans and show more growth in the assets, perhaps. But I think that would mean exposing our shareholders to more risk. There are plenty of investment companies that make loans with higher risk, so shareholders have that opportunity. But for those who want what we believe is a lower risk profile and are willing to give up some profit for what we believe is safer loans, then our stock is probably a good one for you to own.

The balance sheet. Our balance sheet is very strong. At quarter end we had approximately $85 million borrowed on the line of credit. We have $170 million in equity. So we're less than one-to-one leveraged. This is a very conservative balance sheet. As most of you know, banks will be leveraged 10 or 20 to 1; and we believe this risk profile for us is very low.

For the December quarter, net investment income, which is before appreciation, depreciation, gains, or losses, was about $5.1 million versus $4.4 million for the quarter last year, an increase of about 16%.

In this presentation, we're talking about weighted average fully diluted common shares when we use per-share numbers. That is the most conservative way of stating per-share earnings.

Net investment income was about $0.42 per-share for the quarter as compared with $0.38 for the same quarter one year ago. This is a nice increase of about 10% per-share. We think that the net investment income is the most important number we can report, because it is the closest number to the one we use to pay out our dividend. So we hope you focus on that.

Now switching over to unrealized and realized depreciation. This is a mixture of appreciation and depreciation, gains and losses. We like to talk separately about these two categories. First is the net realized gains, meaning gains versus losses. This is really cash. Then the second is net unrealized depreciation, meaning the realized -- unrealized appreciation less depreciation; and this is really a non-cash item.

For the quarter ending December, we had net realized gains of $15,000. That is not much, and we will see if that increases over time. For the same quarter, we had net unrealized depreciation of $1,014,000. This is a non-cash item that comes from the value put on the portfolio. This is not in the right direction, but it is yet to be determined what the final value will be when we receive cash for these loans that got some depreciation.

Remember that the unrealized depreciation reported during the quarter ending is primarily determined by use of the opinions of value of our loans that we receive from Standard & Poor's loan evaluation service, or S&P. It does a really good job of setting the price of these loans that they give us the price on every quarter. They have a good experience in this area because they follow really thousands of loans. We ask S&P to value all the loans in the portfolio that don't have a readily determined market value.

We're the only BDC that does this. Others have various consultants that give them oversight; but that is just a consultant-type oversight. S&P is an independent opinion of the exact dollar value of each loan that we ask them to review. We think this approach eliminates the worries of our shareholders, that they may have with regard to valuing up or down loans, certainly valuing down poor performing loans. We think it is good for shareholders to have an independent party giving them an opinion on the value of the loans, rather than the management team here telling shareholders what the value might be.

Of course, our Board oversees and determines the final fair value. They usually go with the value that is given by S&P. So a lot of folks are involved in determining the value of our private portfolio, and we think that is good. It gives you a good feeling for what is going on in our portfolio.

Now I am going to skip over to the combination number. This is net increase in net assets from operation. This term combines the net investment income, the appreciation, depreciation, gains, and losses. For December, the quarter end number was $4.2 million versus $8.2 million last year this time. This December quarter we are about $0.34 a share versus last year's quarter of $0.71 per-share, a decrease of about 52%.

This is related to the depreciation of the portfolio this time versus the appreciation of the portfolio last year this time. Some of the appreciation that we enjoyed last year has come back down, and so it is entered in as depreciation. Investors really should expect this kind of movement in the portfolio of going up-and-down over time. It is just the way things work in our business.

We did not have any what I call phantom income. This is, you know, the paid-in-kind or original issue discount. We didn't have any phantom income for the quarter ending December 2006. As of April 1, 2006, we have not had any loans with paid-in-kind income or original issue discount. We may have some in the future, but we call this kind of income phantom income because the Company doesn't really receive the cash, but has to pay out the phantom income as a dividend in cash. So it's a very important point, we think. There are BDCs with very large portions of their income from non-cash sources; and that non-cash income has to be paid out as dividend even though the money has not been received. So they have to go borrow money or raise equity money to pay their dividend. We don't think that is a very good way to run the ship. We like the idea of being very conservative.

Our portfolio companies are paying on time as agreed. The value of our loans are now a little bit higher than cost. So all of this shows good strength at the Company.

Loan ratings. The average loan rating for the quarter remains relatively unchanged. The risk rating system we use sets an average of 7.1 for this quarter versus 7.2 for September 30 ending quarter on our originations and loans. Not much change here, so not much to talk about.

Same is true for the risk rating we use on unrated syndicated loans. It was averaging about 6.0 for the quarter versus 6.1 for September 30 quarter end. This is because a lot of these loans that we buy are second liens; and so as a result they are downgraded a little bit lower than our normal portfolio.

Our risk rating system gives you the probability of default that we believe on the portfolio on a scale of zero to 10, with zero representing the highest probability of default, and the risk we see here staying relatively low and not much changing.

We do have some rated syndicated loans, and not many of them. They have had an average rating of triple-C for the quarter ending versus an average B for September 30. So a little bit downgrade also there in some of the second lien syndicated loans. Down a notch here, so keep that in mind as well.

All in all, we are quite satisfied with the current portfolio mix. We think it shares a lot of strength.

Now let's turn over to the marketplace. Since I last talked to you last quarter, the senior and subdebt marketplace for large middle market companies, it's continued to be very robust and highly competitive. Lots of people looking to buy some of these first and second lien loans that we look at. We buy some of them as well. This large loan marketplace is run by Wall Street investment bankers. It has been flourishing over the last couple of years. Rates have continued to move down.

As you know, we have refused to make some investments because the rates are just too low and the leverage too high. The market is just too frothy right now. The risk-rewards that are out there are just not in line with what we think is reasonable.

For senior syndicated loans of $100 million or larger, rates have continued to be strong, somewhere between 2% and 2.5% added to LIBOR. This may be the top of the market, and spreads may widen over the next six months or year, but as of today we see spreads tightening. That is, they have moved from 2.5% over LIBOR to go into more like 2.25% over. We just have to wait and see which way the winds blow.

LIBOR, of course, is the London Interbank Rate, which is recognized as the leading indicator of short-term rates. LIBOR today is about 5.3-something-%. Probably closer to 5.39%. So when you add the 2.5% to that, you get borrowing rates of 7.8%.

You know, debt money is really at the norm today. The norm for LIBOR has traditionally been about 5% to 6%. Businesses are again paying 7%, 8% for their traditional financing. This is very reasonable cost money, and that is why there is such activity in the LBO market, because this is a good rate to have.

The demand for loans in the big capital marketplace by nonbank lenders like hedge funds and bond funds for rated loans is ferociously high today. I think this debt demand will recede over the next year, but that is just a guess on my part. Maybe it is wishful thinking. As of today, demand for senior paper is still strong; and demand for second lien loans is very good as well. So we continue to have some loans in that marketplace that we can put in the books, but are just on the sidelines in many cases.

Now turning over to the marketplace for small company loans, for many of the small companies and their loans the world is very different. We don't see pressure from the syndicated loan marketplace at all. It is hard to syndicate a loan of less than $100 million. Syndications have not moved into our area of, say, $5 to $15 million loans. So we don't really expect them to come in there as well.

The small loan marketplace we invest in is not seeing much competition from banks. But small loans tend to have more risk; and so typically bank lenders stay away. Banks like to do short-term loans rather than long-term loans anyway.

We compete most of the time for our loans in this small area from -- we have competition from small private lenders like the mezzanine loan funds, a few hedge funds, and some of the small business development companies. Our loan request pipeline in this area is still strong. But please remember, our criteria for loans remains fixed on solid fundamentals. We don't alter our lending credit standards just to make our loan production better. Our goal is to be the strong profitable company, not necessarily the biggest company.

We are concentrating on variable-rate loans still today, so that we're not hurt if rates go higher. While our rates are variable, we often have minimums, or as they are called floors; so the rate will drop, but it will stop at a certain point. So right now, we don't have declining interest rates, so we don't worry about that. But if we do, we have floors in our loans so that if rates go down our interest rate won't go down but so far.

We also have in place an interest rate cap to cover any fixed rate loans. This is commonly called a derivative. You'll see some information in our 10-Q about that. All our old fixed rate loans have been paid off, and all our loans now have variable rates. So we are protected if we go out and do any fixed rate loans. As rates have stabilized here, we will explore doing some fixed rate loans. You may see some of those come through in the future.

Our worries? We get this question a lot from folks. Of course we continue to worry about the cost of oil. It has a rippling effect in the economy. It takes money out of the pockets of the middle-class and lower class. They have to choose between spending money on small amounts of their disposable income on things like restaurants or to buy durable or nondurable goods; or choose to save some of that money. So far, they are spending everything they have and more. The U.S. now has the lowest savings rate of any place on earth. It is a negative number. So they are spending more than they are making. I think a lot of that has to do with the price of oil, that they are spending so much on just getting to and from work, and also heating their house.

We are no longer worried about inflation. It may come back, but I doubt it this year. We could probably do a little more with our portfolio, not worrying about inflation. We will have to look at that.

The amount of money being spent on the war in Iraq continues to hurt, of course. We support our troops and want to continue spending as long as it will protect our troops. But we all have to remember that that is draining money out of our economy. It is not productive for us.

Even worse is the pork barrel spending by spending federal and state governments. They are just out of control. Congress is acting I think irresponsibly on so much of the things that they are doing. This new Congress got elected on removing pork barrel spending; and no sooner did they get in than another bill came through that was loaded up with pork barrel spending. It just seems they are all addicted to that kind of spending up on the Hill.

We believe this will lead to excess taxing. Excess spending always leads to excess taxing. So it is going to cause a great deal of dislocation in the economy now.

All of this spending has killed the dollar in terms of other currencies like the euro. It just continues to move in the wrong direction. We are very upset about that as well.

The trade deficit with China and some of the other nations continues to be terrible. We know from reading that China continues to subsidize their industries to the disadvantage of our businesses, and we hope that will change over time.

We still wonder how much the impact in the downturn in the housing industry is going to have. I know some people are calling for the housing marketplace to turn around now. We are not quite in that camp, but we see some people going out and buying lots of stocks of housing companies. The housing bubble obviously has burst, and it may cause the entire economy to come down. But housing prices still have a long way to go to turn back down and then turn around. We are just not sure where all of this is going. The housing downturn will be with us, I think, for a while. But we are still calling for the hard landing and problems in that area. But we may be wrong.

The auto downturn in GM and Ford and the others like Chrysler certainly hurt the economy. But profits at Toyota USA and the other Asian nations that have plants here obviously will help. So I don't know it that is balanced out or not. But we worry that all the industries around the Detroit area can be hurt.

In other ways the economy continues to get stronger. Small businesses kept their costs low; and profits are still improving. I know a lot of folks are calling for profits to flatten out. The manufacturing sector is certainly not operating at full capacity, so there is still room for growth. There has been some slowdown in hiring, we have noticed, from some of the companies out there, and backlogs are coming down.

We may be seeing the first signs of a correction and maybe even the beginning of a recession, but it is just hard to know. As many of you know, the housing downturn may pull the economy down. That is really the way it started in 1989 for the recession that started in 1990. So we will all stay tuned just to see what happens.

We do anticipate that we will be updating our shelf registration statement for an offering. That will come out probably in the next few weeks. We are going to need to raise money this year, so keep that in mind. We don't like to go out and raise a lot of money each time, because it is too much dilution. So don't expect us to do that.

Also, our dividend was increased in October. The dividend is now $0.14 a month, a run rate of about $1.68 per year. With the stock trading at about $23.47 as it closed yesterday, the yield on the stock is now over 7% at 7.15%. That is a wonderful rate on a good conservative company like ours.

Please go to the website and sign up for our e-mail notification. We don't send out junk. It's just the news on your Company. Go to www.gladstonecapital.com; and you can also sign up for our free newsletter from the management company at gladstonemanagement.com.

In summary, as far as I can see in 2007 it really looks good. We can only see a couple quarters out, so we want to be careful in making that kind of notation. But we are stewards of your money, and we will stay the course until we see something changing. We want to be conservative in all our investment approaches.

At this point, I will stop and open it up for questions. So now let's have some questions about Gladstone Capital.

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

This is actually Ty Powers on for Vernon. A couple of quick questions. The unrealized depreciation of about $1 million, was that from any particular companies? Or was that pretty broad across the portfolio?

I'm trying to remember, but my guess is it is pretty broad. There is not any one that took a big hit.

Okay. Then also the credit to the incentive fee, it looked like a little under half, you said, was from a credit from a voluntary waiver issued by the Board. Can you provide just a little more color on that, and whether we will see that in the future, on future incentive fees?

Yes, what happened there is when we converted over, as you know, we had a big stock option plan. I think it was worth about $50 million in terms of the way the SEC calculates that. We gave that up to go to this incentive fee.

The problem with doing that, of course, is you need to ease into it. So in order to do that, what the management company did is it made sure that the Company had enough earnings to cover its dividend; and then paid the fee that was above that. If we had paid the whole fee that was due, it would have taken the Company down below the necessary amount to pay the dividend.

So our goal here is to never cut the dividend, of course, and to ease into this fee. So the management company voluntarily gave back part of that incentive fee in the calculation. That is a loss forever. It doesn't sort of sit there and get accrued and hopefully one day get paid. It is gone. It is done every quarter.

So we will probably see that in the next quarter or two at a decreasing rate?

That would be my guess. We had an awfully good quarter as you know, and have had good success since the close of the quarter and the beginning of this quarter. So we are hoping that the earnings will ramp up and take care of all of that. But again, first and foremost, we are desirous of making sure that we don't hurt our shareholders in any way by damaging the dividend that we have.

Okay, that's all I had. Thank you.

Jason Funk with Ferris, Baker Watts.

I noticed you had a term sheet's about $7.5 million; and then how much of that was funded prior to the -- after the end of the quarter? Was that full $7.5 million included in the $47 million, I guess?

My guess is that most of it was. So we had a list of term sheets that we have, and sometimes they close and sometimes they don't. So I would have to go back and look at that.

But we are regularly issuing term sheets. The requirement under recording is that you have a term sheet out and you think it is going to close, you got to include it in there. So it gets kind of funky the way we do that.

Second question relates to the success fee on Mistras Holdings, the $1.2 million. Was that included in the interest income line of $7.9 million?

Yes.

It was? What would the yield have been net of that fee, do you know?

Harry? I'm just looking around.

We would have to go check.

We would have to go back and analyze that. I am not sure.

Back to the unrealized depreciation, do you have any more specifics on that, based on was it syndicated loans, or --?

Actually, Jason, it was really two areas that we looked at. Both of them were not syndicated loans. Both of them were things that we have. Two companies stand out in my mind; I don't like to mention the names. You can obviously go down the list of loans and pick them out, of which two were the largest of the ones that got depreciation.

As you know, we had a large amount of appreciation in the portfolio, so it had gone up. So now this is taking some of it away, of the appreciation before. I think over time, Jason, you're just going to have to put up with the fact that it goes up and down. Thank goodness that is non-cash, so it doesn't count towards the dividend paying ability of the Company.

It is just one of the things that -- you know, Standard & Poor's are wonderful people. They have a great system for valuing these things. But they do run it through their system; and if their system picks up something that it doesn't like, it will downgrade a company. It must have hit a couple of these and felt like they were not doing as well as they thought compared with others in their portfolio. So they downgraded it.

But you can figure that out by just going down a list on the portfolio, the schedule of loans and investments. You can see cost value, cost value, and you can see the change. You can compare it with last year's or -- and you can see how they move around.

I am really not worried about that. It was, it is something that you look at. I know the companies involved, and we are not worried about them or losing any money. But you have to show some depreciation in the sense that, if you had to sell the loan today, what would you get for it? That is the method that we use. That is the way most people are supposed to be doing it. I don't think there is any other method.

The desire here is to make a guess that, if you had to liquidate the whole portfolio today, what would you get for it? That is what our best guess is. You know, if a company is having a little problem and not meeting its numbers, then obviously the loan is worth less. You have got to figure that out. We rely in large part on Standard & Poor's for that.

Okay, great. Thank you.

Scott Valentin with Friedman, Billings, Ramsey.

Can you comment on the origination volume? You mentioned it was very strong. Anything new in the market you're seeing? You mentioned the spreads are still tight in the larger, the higher end of the market; but small-business market remains still pretty attractive. Did you see anything during the quarter that drove you to maybe be more aggressive in originations?

No, Scott, we haven't changed our criteria. We are continuing to do more or less the same thing we have always done. So it just so happened through luck of the draw that the companies that came to us in the quarter ending December and those subsequent to that quarter were of the type that we felt the risk and reward were justified. Thank goodness the other side believed that our pricing was the right pricing as well, and we were able to close those loans.

I think we are beginning -- and this is just a guess on my part -- that there's some changes going on in the marketplace, and that we are going to see a better origination in '07 than we saw in '06. But again, Scott, you can sit in my chair all you want to and try to guess what the originations are going to be. And I can guarantee you, whatever number you put out there is going to be wrong.

We do it every month. Every time we get the financial statements we turn around and do projections again. Right now, I think we are on a roll and I think things are going our way. But they could just as easily tomorrow turn the other way. So I can't give you any firm definitive answer as to what originations are going to be going forward.

Thanks very much.

Richard Shane with Jefferies & Company.

A couple different things here. First of all, given the credit back to the management fee for the quarter, which was $880,000, should we look at that as basically having to be absorbed in terms of earnings before you can start raising the dividend again?

Maybe. It depends on how strong and how fast we move, but I think that is a good way of looking at it. You have got to earn that before we can increase the dividend.

But that is up to the Board. If the Board decides that they want to increase it from 14 to 14.5 and make it a little more difficult for us to get there, then we will live with that. We want to do what is best for shareholders. We will have that discussion as we did this time with the Board, and hopefully in April they will make their determination and decide whether to raise the dividend or not.

Got it. Second question, you know, you talked about the level of the competition. I think one of the things that has evolved since you went public in August of 2002 was huge growth of the CLO market and the CDO market. Do you think one of the reasons that you're seeing the level of spread compression is because the way that these loans are being financed by your competitors is different than it has been in the past? Is that going to be an ongoing challenge?

I don't think there has been that much change. The CLOs have helped a lot of liquidity in the marketplace; and the hedge funds have certainly added to that. So we are seeing an international -- it is not just the United States -- it is an international credit liquidity that is just incredible. There is money sloshing around everywhere these days. It is looking for a home.

But as you know, Rick, over the years, that can change on a dime. If sentiment changes in the next 30 days to be negative, people start pulling their money out of the marketplace, and rates can change right around.

So I remember in 1989, everything was fine in December of '89. But by the summer of 1990 it was a disaster. Everybody had pulled back and money was tight. The same thing happened in 1990. You just -- sentiment will change at some point in time, and it is usually sentiment changes because there are problems in people's portfolios, or some government agency makes a decision to do something like the Fed or the OCC.

At this point in time, the competition is the way it has been for the last two years, as far as I am concerned. I haven't seen that much change in two years. Now you're right, back when we founded this Company and in the ensuing years, those were the years of recession after 9/11 and money was tight. So as a result, I think that was quite a different time. But the last couple of years have been more or less the same in this area.

Okay, thank you.

Joel Houck with Wachovia Securities.

Can you give us a sense for maybe the portfolio spread, the LIBOR, say at the end of December; and kind of where that trended during 2006?

Then, any comments or thoughts you can offer about what's it going to take to maybe see middle market become disrupted? Wider spreads, perhaps higher defaults, if that is even a possibility in '07 given all the liquidity out there?

I wished I had a crystal ball on that one, Joel. It is hard for everybody. We are all trying to guess that. When we talk to our compatriots in this industry and go to conventions and speak, there is a common lament of the huge liquidity in the marketplace today.

I think what it will take is what it always takes -- is people getting worried about their portfolio and beginning to pull back. As you know, in the home mortgage business, we have seen the subprime mortgages spike up to about 10% default rate. Of course, many of the banks that were in that marketplace have pulled back pretty dramatically from doing subprime (technical difficulty).

There seem to be others that are filling that niche. But at the same time, that is an indication of problems in that marketplace. I have not seen it in the marketplace that we are in, either of the marketplaces, either in the large syndicated loan marketplace or in the small loan marketplace. I am not seeing any pull back and I am not seeing any big changes going on, other than the one I mentioned in the syndicated marketplace where it seems to be tightening a bit rather than loosening.

The same thing is going to be true there. Unless Bernanke decides to change interest rates or some big default occurs and people sort of look at that and say, maybe it could happen to Boleo and I am not going to buy any more of these, and pull out of the marketplace. Until something like that happens, I think we just end up going along the way we are today. I wished I could project when it is going to happen, Joel.

Yes, it is kind of funny. Because I think in past years, what we have seen in subprime mortgage probably would have spilled over to other asset classes; and that just hasn't happened. So I just was curious as to your thoughts. Back to kind of the first part, do you have a sense for the spread on your portfolio relative to LIBOR?

Well, certainly, the senior syndicated loans, the senior side of it is probably around 2.5% over LIBOR. That seems to be where we are today. I think the second lien part of the portfolio is somewhere between 6% and 7% over LIBOR, probably averaging about 6.50% or 6.25% or so. In the regular part of the marketplace, we are pricing most of our second liens and mezz at anywhere from 6% to 8% over LIBOR. Some of them are a little higher than that, but that is generally where the marketplace is today.

I know Gladstone is a low-risk vehicle in terms of assets. But if the market became disrupted, would this entity, apart from Gladstone Investment or gain, would you do more mezz in this entity? Or is there -- are you going to kind of keep the funds segmented in terms of what they're going to invest in?

No, we keep the portfolio segregated. As you know in Gladstone Investment we are much more oriented toward buyouts there. We do a one-stop in terms of providing all the financing there. So that portfolio will be more oriented towards the buyout world. Over time, we are continuing to build some senior syndicated loans over there. You should see that portfolio continue to go in that direction.

In Gladstone Capital, from its inception we have talked about doing senior and second lien loans. I think we will stay in that marketplace. We may do some mezz from time to time; but that is really not the orientation of the Company.

Okay, thanks for your time, David.

Brad Golding with CRC.

I have a couple questions, so if you need me to go back in the queue, please just let me know. As a follow-up to Jason's question, the average yield of 13.7, is that just basically taking the revenue line and dividing by the total assets? Or is that an actual, going in and taking a weighted average yield of the investments?

It is the latter. We have a whole long list and we go down the list and we work the list.

Okay, but does that include success fees?

No, there's no success fees in that. You should know, also, that we have one little equity position in the portfolio; and it doesn't include that as well. There is a warrant in there.

Right. Then in a tighter spread environment, where you are seeing the senior loans are getting L plus 250, how did quarter-over-quarter the average yield go from 12.7 to 13.7?

Just put on a lot more proprietary deals, (multiple speakers) the ones that are not syndicated.

Because certainly the coupons, in just looking through the Q, look fairly low in the new stuff that you have put on. You are buying these at a discount, I take it.

Sometimes.

Okay.

I just have a long list here. I can go down the list and read off each one of them, but the bottom line of all of that is -- that is what the number is. We check and doublecheck, because we don't like to report numbers that we haven't reviewed several times over. But it's our list of loans, and weighted average, that is the usual.

Okay, maybe I can call the IR person off-line because it is not intuitively -- not having any OID, seeing low coupons in the portfolio, and seeing the current yield shoot up, is not intuitively pleasing.

Just take a minute and go through it. Because there are obviously some 14.4% yields, there's some strong yields in there. So don't discount our analysis. I'm telling you we have a --.

I am not discounting your analysis. I just said it was not intuitively pleasing, because I didn't have time to download it into a spreadsheet and compare it across. But just eyeballing the new investments that I saw, they had kind of single digit yields.

You have discontinued the employee stock run line in the balance sheet. I guess you have consolidated that into loans. Do you have a number for that at present?

You're going to have to repeat the question. We were fumbling with papers here. Trying to --.

No problem at all. The size of the loans to employees for stock, that is no longer being reported on the -- it's no longer being broken out in the Q or the press release. Do you have a size on that?

Yes, it should be in the Q and it should be in the balance sheet. (multiple speakers) Look at the balance sheet; it's down --.

I think it was consolidated into another line, but I can look again.

No it's not. Look down. We have to deduct that from the net worth. So look at analysis of net assets, in the balance sheet. So you've got assets, liabilities, and then analysis of net assets. It is right there. It is $10,248,000.

Indeed. Thank you very much. My next question is, when the leverage is still relatively low, meaning there is probably a decent chunk left in terms of your line, and you're having a difficult time finding new investments, why do an equity raise?

Well, we won't do an equity raise until we run out of debt money. Obviously, we will continue to borrow money until we run out of debt money. That is the given.

But we always put our shelf in place so that when and if we run out of that money we have the shelf available. My guess is given the rate that we are running at, we are going to run out of money this year. Remember, business development companies have a prohibition of leveraging greater than 1 to 1.

I understand that. But on the -- certainly in following the past calls, there has been a recurring theme of difficulty in finding -- and certainly on this one -- attractive investments. By expanding the equity base, that doesn't help that.

We are not going to extend the equity base until we run out of debt money. And that -- you know we run out when we hit $170 million. So when we hit or get close -- you obviously don't want to go right up against that number. But when we start getting close to borrowing $170 million, we will have to do an equity raise or shut down the Company.

Stop making new loans? Yes.

You can only make new loans to the extent that they are paying off if you don't raise (multiple speakers).

Right, right. On the $568,000 credit, when was this decided? In the Q, it looks like there was a -- it says as of October 1; but clearly a decision was made after that. Can you give me some idea of when that --? Was it made after you saw the earnings?

Yes, you have to know what the fee is before you can make a decision about it. So at the Board meeting in January is when that was decided.

Okay, so you basically saw you were going to miss, and then credited back enough to make the number.

That's right.

Okay.

Mr. Gladstone, there are no further questions at this time.

Okay, Diego, thank you so much. You ran a good show. We appreciate it. Thanks now and that is the end of this program.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you all for your participation. All parties may disconnect now. Thank you.