Gladstone Capital Corp (GLAD) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Gladstone Capital fourth quarter 2007 earnings 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. Mr. Gladstone, you may now begin.

Well, thank you, Jackie. This is the quarterly conference call. It's also our year-end conference call for shareholders and analysts for Gladstone Capital, trading symbol GLAD. Thank you all for calling in. We're happy to have shareholders and analysts call us, and here's an open invitation for you to visit us here in McLean, Virginia, just outside of Washington, D.C., so please stop by and say hello if you're in the area. You'll see some of the finest people in the business working here.

I do need to read the statement about forward-looking statements. 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 current plans and we believe those plans to be reasonable. There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including those factors listed under the caption, risk factors, that are in in our 10-K filing as filed with the Securities and Exchange Commission and can be found on our website at GladstoneCapital.com and also 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.

The quarter ending September 30, 2007, was relatively poor for our company in terms of increasing assets. It was also one of the most volatile in the financial market places that I've seen in a long time. Because it was so volatile, we held back on making new loans. We invested about $8 million in -- to existing portfolio companies. Some in the form of additional investments, but a lot of it was in the form of draws on the revolving facilities that we have outstanding. However, during the quarter, we did receive repayments of $22 million, $12 million which was early repayments of certain syndicated loans, those all paid off at par. And $6 million was an early repayment of a media loan as part of that portfolio that we had purchased. That was also at par. The rest was just normal amortization paydowns of the revolvers. Unfortunately, this results for the quarter meant that repayments of $14 million -- meant an overall repayment of $14 million for the quarter, are decreased by that amount.

For the year ending September 30, 2007, we invested $262 million, which includes the purchase of $63 million of media loans and received payments of $122 million, including some syndicated sales. And amortizations -- normal amortizations for net new production of $140 million. During the year, we sold some of our syndicated loans that we needed the money to invest in non-syndicated loans. Those non-syndicated loans carry a higher rate of return and also have better terms than the syndicated loans. At the end of the quarter, our investment portfolio was valued at about$350 million and our cost was $356 million, so we're about even numbers here. After September 30, we invested $56.7 million in new non-syndicated loans and were repaid about $1.6 million from our loans. We're now making new loans at relatively good terms and at higher interest rates, so we're happy about that.

Since inception we've made loans to 120 companies. We've also been repaid or exited from 60 companies. The average return on exits has been about 12.3% for syndicated loans, about 16.5% for non-syndicated loans. So seem to have good returns there. At the end of the quarter, we had one loan past due with a cost basis of about $2.2 million. This is one of the loans that we purchased. This was a $4 million loan that we purchased in a pool of loans at the end of June. I hope we'll have this one fixed in another couple months. To date, all of our investments have had a positive internal rate of return, and this leads us to say again, that the program that we set up when we founded this company is working as we planned. We don't feel it necessary to change a lot of our strategy.

We have seen a noticeable change in the opportunities coming to us. Banks are calling us, and so are LBO funds. The market has finally come our way. We intend to make some good loans during this time period. The balance sheet is still strong. At quarter end, we had approximately $144 million borrowed on the line of credit. We have $221 million in equity, so we're much less than 1 to 1 leverage. This is a very conservative balance sheet for a finance company. We think the risk profile is relatively low.

In this presentation, we're talking about weighted average fully diluted common shares when we use the per share numbers. That's certainly the most conservative way to state earnings per share. The funds from that offering that we had recently have been fully invested and should increase going forward. The increase in share -- the increase in the number of shares reduced earnings by about $0.03 a share, but we should be cruising along at a good pace now.

For the September quarter, net investment income, which is before appreciation, depreciation, gains and losses, was about $5.7 million for this quarter versus $4.9 million for the same quarter last year. That's about a 15% increase, a nice increase, but on a per-share basis, net investment income for the quarter was about $0.39 a share for that quarter as compared to $0.42 for the same quarter last year. That was a per-share decrease of about $0.03 a share. All of that is attributable to the dilution in the share issuance during the quarter. In other words, an additional 2.8 million shares were issued and that made the average shares go up and that made the comparison on a per-share basis go down.

For the year ending September 30, 2007, net investment income was about $22.3 million versus $19.4 million last year for the same period. Again, that's a nice increase of about 15%. Net investment income is about $1.69 per share for the year ending September 30, 2007, compared with $1.67 for the same period last year. A modest share increase of about 1%. The percentage increase in earnings per share did not increase relative to the percentage increase in net investment income due again to the increase in the weighted average shares outstanding of about 1.6 million shares as compared with the prior year. As all of you know, net investment income is the most important number that we talk about because it's the number closest to our taxable income, and that taxable income is income we use to pay our dividends. So this is the one to watch.

Now let's turn over to unrealized and realized gains. This is really a mixture of appreciation, depreciation, gains and losses, and we like to talk about this in two categories in this section. Gains and losses in one category, those are cash items, while appreciation and depreciation are noncash. For the quarter ending September, we recognized $37,000 in net realized loss on investment. This is primarily from the sale of a couple of syndicated loans.

Unrealized depreciation reported during the quarter ending is primarily determined by use of opinions of value on our loans that we receive from Standard & Poor's loan evaluation service, or as we refer to them as S & P. They do a good job of setting the price on our loans each time we come to quarter end. They have good experience in this area because they follow thousands of loans. We ask S & P to value all of the loans in the portfolio that don't have a readily determined market value. We do this every quarter. We believe we're the only BDC that does this. S & P gives us an independent opinion of the exact dollar value of each of the loans that we ask them to review. This eliminates the worry that our shareholders may have that we're not writing down poorly performing loans. We think this is really good for shareholders to have an independent third party to give them an opinion of value of the loans rather than an advisor like us telling you what we think the value is. Of course, our board oversees this determination of fair value so a lot of non management people are involved in the determination of the value of our private loan portfolio.

Because this is a valuation from an independent third party, you see a lot of variation in the number. Last year it was up a lot. Now it's come back down due to the panic in the syndicated loan marketplace that I will talk about later. For the quarter ending September, our assets had a net unrealized depreciation of about $4.9 million as compared to the prior year which was a net unrealized appreciation of $199,000, and for the year ending September 30 2007, we realized a gain of $44,000 and also recorded an unrealized depreciation of $7.4 million as compared to the numbers last year, of a net realized loss of $904,000, and unrealized appreciation of $6 million during the prior year. So that $6 million of appreciation last year came back down, plus another $1.4 million as part of this volatility in the debt marketplace.

As all of you know, depreciation does not have an impact on the ability to pay the company's distributions to shareholders. All of our loans except one are paying as agreed, but S & P, looking at all the marketplace and the panic that was going on, thought some depreciation was necessary because of all these changes in the market. When you ask someone like S & P to value your portfolio, you should expect to have some volatility in volatile markets like this. This is because the technique being used is the value of each of the loans if they could be sold on a single date. That is, the last day of the quarter. This is a much harsher technique than used by other funds that used the liquidation analysis which said if the business could be sold today, would the loan be repaid. That's called an enterprise value method. But all of these valuations, regardless of how you approach them, conservative or liberal, all of these are just guesses, and until one tries to sell a loan you really don't know what it's worth.

Now let's turn to the net increase in net assets resulting from operation. This is a term that combines net investment income, appreciation, depreciation, gains and losses. It adds everything together. It's kind of like adding up all the apples and oranges and tomatoes in one big pile. For the September quarter, the number was $739,000 versus $5.1 million last year at this time. The September quarter, we had about $0.05 per share versus last year, $0.43 a share, a decrease of 88% per share, all due again to the panic in the debt marketplace, causing a lot of this depreciation. For the year ending September, this number was about $15 million versus $24.4 million last year, or $1.13 per share versus $2.10 per share. For both the quarter and the year just ended, this difference is related to the depreciation of the portfolio this time versus appreciation of a portfolio last time. And investors should expect this kind of volatility in the portfolio during times like we're going through now.

Let's talk about the paid in kind, our PIK interest. We didn't have any of this PIK interest. We call it phantom income, for the quarter ended September 30, 2007. There's also original issue discount in this PIK income and OID income that you have to accrue on your books for tax purposes but you don't receive the income until much later, sometimes not at all. We call this income phantom income, because the company does not receive the cash but has to pay out the phantom income. It's a very important point, because there are other investment companies with very large portion of their income from noncash sources and that noncash income has to be paid out as a dividend even though the money has not been received. So they have to borrow the money from the bank to pay their dividend and we don't like to do that, so we've avoided PIK income as much as possible.

The money we receive from interest payments is the money that we do have available to pay dividends, and this is a very conservative way to run the company. However, I do to have remind you that subsequent to the quarter end, we did have one of our investments has a provision in their loan agreement, $0.5 million, that gives them the ability to capitalize their monthly interest that's paid in kind, so this company that we took over is going to have some PIK income, about $4,000 month. So not much in the way of tiny PIK interest, but it will keep me from saying next quarter that we don't have any loans that have paid in kind interest.

All of our portfolio companies are paying on time with the exception of the one loan and this shows great strength going through the period we've just gone through. Our average loan rating for the quarter remains relatively unchanged. The risk rating system we use for non-syndicated loans was 7.3 on a 10-point scale this quarter, versus an average of 7.2 for the same period last year. The risk rating that we use for unrated syndicated loans was about 6.0 for the quarter this quarter ending versus the average of 6.1 for the prior year. That's the September 30 quarter ending. As for our rated syndicated loans, they've had an average rating of a triple-C plus, or CAA-1 for the quarter ending September 30.

Risk rating system gives you the probability of default and portfolio on a scale from 0 to 10 with 0 representing the highest probability of default. Needless to say, over the period, we haven't sustained the kind of loss that we've indicated in our system of grading these loans. Perhaps we're being a little too conservative on the grading, but it is what it is. We're quite satisfied with our current portfolio mix and think things are continuing to go along quite nicely. Subsequent events, most of you know we sold from our shelf registration 2.5 million shares of common stock on October 19th at a price of $18.70 per share. In November, the underwriters exercised their option to buy additional 375,000 shares of common stock at the same price. We needed to increase our equity base so that we continue to make loans and we'll be seeking expansion of our line of credit as well as we continue to grow our loan base. We'll be updating our shelf offering soon to put it in place for offerings sometime in the future.

After September 30, 2007, as mentioned before, we did invest $56.7 million in new non-syndicated loans and we were repaid $1.6 million in loans. We are very pleased with the start of 2008, our fiscal 2008 that ends in September 30, 2008. As you can see, we're off to a good start and repayments are not nearly as high as they have been during the frothy period, and we're getting a lot more phone calls about making loans to small and medium-sized businesses.

Let me turn now to the marketplace. Since I last talked to you at the end of the quarter the senior and sub debt marketplace for large middle market companies has had tremendous liquidity problems. For a while, the marketplace was actually closed. That is, there were no buyers of these loans. But now there are transactions going on, and sales of old transactions are picking up. As you know, we buy some of these first and second-lien loans when the companies issue them and we've sold some of these senior syndicated loans at times when we needed the money to invest in non-syndicated loans, but with the panic this summer, the rates have change and now the loans that we have on our books are worth a bit less than the face of the loan so in order to sell them, we'd have to take a small loss. We often weigh the alternative on the one hand of selling some of these loans at a loss in order to raise money to make these non-syndicated loans, or raising money by selling stock. It's a question we ask ourselves often.

We have about $75 million at our cost basis in these senior and second lien syndicated loans. My guess is today that they're worth about the same as the index for all the syndicated loans, which currently is running about $0.96 on the dollar. So we'd have a small loss if we sold them all off. For senior syndicated loans, $200 million or larger, rates have changed. It used to be 2 to 2.5% over LIBOR. Now it seems they're 3.5 to 4% over LIBOR. Because the new loans are at a better rate, this causes the old loans to have a lower market price. But if we hold these loans to maturity, they are paying as agreed. They should pay off, and we should get 100% back with no loss so that's the puzzle that we have to solve of whether it's better to hold on to these and raise new equity or whether it's better to sell these off and do the new non-syndicated loans. All of these syndicated loans are paying as agreed so we have no problems there.

By the way, LIBOR is the London Interbank Rate, which is recognized as one of the leading short-term indicators of interest rates. It's about 5.4% today. The norm has always been in this 5 to 6 range so businesses are again paying 7.5 to 8.5% for their traditional financing. Money is still relatively low-cost in most companies. If we see rates continue to go down it will certainly help those who want to borrow more money. That's for the larger companies that we help finance sometimes with the syndicated loans. The demand for loans in this big capital market place from people like hedge funds and bond buyers or bond funds, their rates for these loans, the rates for these loans are high today, and the demand for them is relatively low. They're really few buyers of these loans today, and the marketplace is kind of limping back. I think we'll see that change in the first quarter of '08.

Small company loans. For all of these small companies and their loans, the world is still a different place. The small loan marketplace that we invest in, in the non-syndicated loan is not seeing much competition from banks. Banks have pulled back pretty dramatically and tightened up their credit standards. Most banks do not make the kind of loans that we make anyway. We have to compete for our loans with other small private lenders like Mezzanine Loan Funds and some hedge funds and some of the smaller business development companies. Our loan request pipeline is very strong today. We see a very strong outlook and it may materialize into many more new loans for us. We'll have to check that out with you next quarter.

Our goal is to be a strong, profitable company, not necessarily the biggest, so we're not going out for volume. We're going out for quality. We are concentrating the on variable rate loans so that we're not hurt if interest rates increase. I don't think that's on the horizon right now. While our rates are variable, we often have a minimum rate charge, so that, as we call it, a floor, so that if rates go down and decline we won't go down but so far. And these floors tend to be in the 10 to 11% range.

At September 30, we have one fixed rate loan on a cost basis. It's $3.1 million. Subsequent to the quarter-end, we funded two fixed rate loans in an aggregate of $13.5 million so we now have three loans that are fixed at nice, high rates. We have in place also an interest rate cap to cover any fixed rate loans that this is commonly called a derivative and we put this in place so that if interest rates went up we'd be protected against that. The cap will protect us I think against any increase in interest rates on our fixed rate loans so we're putting some fixed rate loans in place right now before rates go back down very low.

We continue to worry about the cost of oil. It's just way too high. The problems in the Middle East and Nigeria, Venezuela, we just don't see prices falling any time soon, and these high oil prices take money out of the pockets of our middle class citizens and they don't have the money to buy durable goods or nondurables, or even restaurants as often as they did. They certainly don't have any money to save. We have the lowest savings rate in the world. We're no longer worried about inflation. It may come back in 2009 or 2010 but we don't see it on the horizon right now.

A big worry still is all the money that government is spending, especially the war in Iraq. It hurts our economy to spend so much money over there. We all support our troops in Iraq. They are the true heroes of this period of history. They risk their lives for all of us and we thank them for doing that. Even worse is the pork barrel spending by federal, state, and local governments. They're just simply out of control.

There's an example for all of you. In 1930 total government spending was about 12% of all economic spending in the United States. After the New Deal of Roosevelt and the very expensive World War II, we pushed it up to 22% of all the income being spent. That was in 1947. Today in 2006, all spending by state, local, and Federal Government is now 44% of all national income. And it's growing at four times as fast as the economy. In a few years we'll be officially a socialist economy with more than 50% of national income from government spending. It's just hard to believe that the excess taxing, the excess borrowing and the excess spending is doing anything other than causing a great teal of dislocation in our economy. It's certainly killed the dollar in terms of other currencies like the euro.

We continue to watch the trade deficit with China and other nations. It's just terrible. China continues to subsidize their industries to the disadvantage of our businesses. We wonder how much impact the downturn in housing and related -- the related disaster and home mortgage defaults are going to have on the rest of the economy. No one knows how many home mortgages will fail but our best guess is it's no more than a $200 billion problem. That's not enough to cause a big recession. If you will remember, the Internet bubble was a $7 trillion loss. That's really a recession.

The subprime mortgage problem I think will be over in three, four months in terms of how it is impacting the marketplace. On the other hand, the housing trade is -- most of those folks are out of work. They really can't apply for government help because so many of them are here without visas. I'm not sure we have a good fix on the number that are unemployed. There are reports that many of the illegal immigrants have gone back home to Mexico and Honduras and El Salvador, wherever, and are not even in the economy any more.

In spite of all that's negatives that we see, the industrial base of the U.S. is still as strong. Small businesses kept their costs low, their profits are strong. They're not going up as much as they did but they're still in good shape. Manufacturing is not operating at full capacity or anywhere close to it right now. However, we do see a slowdown in hiring and backlogs have come down some with but there's no recession on the horizon right now, and the subprime problem is not going to cause a recession as far as I can see. It's just going to make things a lot slower. Car sales tend to be strong, so all of the economy looks reasonably good for the next six months. That's about as far as I think we can see out.

Our dividend is $0.14 a month, a run rate of $1.68 a year. We should be declaring a dividend in January for January, February, March. No reason to cut the dividend, certainly. We'll have to see if December quarter earnings in order to determine if we want to raise the distribution to shareholders. Our dividend rate now with the stock price -- as you all know, it's come down dramatically. We're yielding about 8.6%. Stock came down on new stock sales but really shouldn't have. The new shares that we sold this fall should be fully invested by the end of the year and therefore there will be little dilution in the earnings from the new shares.

As you all know, we're generating a good return on the new loans that we put out at higher yields than in the past, certainly much higher than the 8.6 that the stock is selling at. In addition, we can borrow half the amount that we're lending to our portfolio companies and the interest rate is substantially lower as well so all of that spread ends up going to the bottom line. This is the way we're going forward. Please go visit our website at GladstoneCapital.com. You can see all the news and sign up for notices. We don't send you a lot of junk mail and you can also get the occasional newsletter by signing up at GladstoneManagement.com.

In summary, as far as we can see, the outlook is very bright. We certainly think the opportunities for us have increased dramatically but we are stewards of your money and we'll stay the course and continue to be conservative in our investment approach. At this time, Jackie, if you'll come on board we'll open it up for some questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. (OPERATOR INSTRUCTIONS). One moment, please, while we poll for questions. Thank you. Our first question is from Rick Shane of Jefferies & Company.

Thanks, David, for taking my question. Just one conceptual question. This quarter, the credit against the management fee was lower than it's been, which directionally, I think is a good sign, but the NOI and the GAAP EPS, neither have covered the dividend. If you look back through the year, you had a very strong second quarter where you did substantially exceed the dividend. Is the policy going forward that you'll manage back to the dividend? Did you just have the coverage this quarter? Or should we expect to continue to see quarters where you don't, from an NOI perspective, cover the dividend?

I think we'll cover the dividend in all of '08. Some quarters come in a little short because you've issued shares. I think that's what happened in the quarter ending September. We had issued the shares in the third quarter, and didn't get the money invested until -- get the equity part of it invested until about June 30. We got into our line of credit during the quarter, so the September quarter was a pretty miserable quarter for many reasons. We didn't put a lot of deals on the books and didn't have ourselves fully invested, that is, leveraged up on the new money we had raised. We've since done that. We've raised additional money. We're hopeful that by the end of December we'll have all of that invested as well and continue to grow the asset base which should indicate higher returns to shareholders.

Understood. But in quarters past, when you had that sort of differential or those challenges, you were more aggressive about crediting back the management fee, and this quarter obviously you didn't. Can we see that -- should we see that stepping down consistently going forward, or under circumstances like this again, would you increase the credit?

We'll always increase the credit enough to meet the dividend. That's not -- our policy has always been to make the dividend. If that means crediting, we said that from the beginning when we converted over. I think you're going to see gradually work our way out of that in '08, so that we're paying the incentive fee to the management company as well as covering the dividend pretty easily and hopefully even increase the dividend.

What is your time frame for eliminating the credit?

I think it will be over in fiscal '08.

Thank you, David.

Next question.

Thank you. Our next question is coming from Scott Valentin of Friedman, Billings, Ramsey.

Good morning, thanks for taking my question. You mentioned that you conscientiously reduced your origination volumes because of the volatility in the capital markets. Did you see less deals coming to you or you just turned deals away? Secondly, sounds like you're more comfortable now with conditions in the capital markets given the originations you've had in the quarter and your description of the pipeline being full, but it but seems to me the market is still pretty volatile. Can you give a little more color on where you see the market going in the next two quarters?

We worked hard trying to understand what had happened. As you know, black Friday came in July, and the marketplace pretty much turned up side down. We always pull back when a marketplace becomes highly volatile and moves around. Today I think we understand what's going on in the marketplace today. There are an inordinate number of finance companies that have problems, mortgage companies having problems, but we understand that now and so as a result of understanding it, I think we can make hay while other folks are trying to figure out which way the wind is blowing. We personally don't believe that this is a big deal, that by sometime in the spring, perhaps maybe it's even quicker, most of this will be sorted out, and as a result of that sorting out, people will hopefully come back to their senses and start doing some of the syndicate loans that they've shied away from.

But while they're gone, the banks have pulled back. Many of the other finance companies and certainly a lot of the CDOs and those kind of folks are out of the marketplace now. With them out of the marketplace, it makes it good for us. Think all the BDCs, not just us, will have good quarter ending December, certainly March, and maybe June, before people figure out that the subprime mess is a $200 billion problem, not a $7 trillion problem. And that there's not going to be a recession, that it's just going to be a slowdown. As I've said before in some of these conversations, I find myself agreeing with a number of people saying this is much more like 1998 than it is 1999. It's certainly much more like -- not like the 2001 recession that we had. From my standpoint, I think it's just a great opportunity. As you can see, the first two months of this quarter, pretty good volume coming through. Because the marketplace is not hot, not many pay offs, so as a result, I think you will see the asset base build up and hopefully over time you will see the dividend rise with it.

Okay, and just a follow-up question. On your underlying companies, your credit quality is still excellent, you mentioned one loan giving some problem but in terms of EBITDA and revenues for your underlying companies, most are domestic, I believe, with very little international exposure. Can you talk about the performance of the revenues and EBITDA of the underlying investments?

We've seen some strong, some weak, so it's a mixed bag. It's not something that -- as you know, we have a lot of different industries in our portfolio. We are very well diversified. As a result, we see all the ups and downs going out there. Some of it is due to management style, but a lot of it is due to economic softness and so we're seeing both increases in some of our portfolio companies and decreases. None of them are against the wall in having problems such that they're going to go out of business. This one company that we had, just the LBO group decided not to support them any more, walked away from it. We had bought this loan as part of a loan pool that we had -- that we bought from Wells Fargo. It was a $4 million loan. We had marked it down to $2.2 million. So we took over the company, put a new management team in. As a result, within a couple quarters we'll be fine.

Okay, thank you.

Thank you. Our next question is coming from Ming Chao of Strategic Financial Solutions.

Good morning. I had a quick question for you on the type of loans that you loan out to businesses, what type of business do they consist of? Is it commercial real estate or commercial businesses?

No, these are all commercial businesses. It's not secured usually by real estate. There may be some real estate in some of these transactions but not a lot. So as a result, you'll see the portfolio, I would call your attention, there's a section in the 10-K that goes through each of these companies, not goes through each of companies but goes through the portfolio in terms of who they are and what they do. You will see a wide variety. Most of these are small manufacturing companies, service businesses, those kind of companies.

Great. Thank you very much.

Next question?

Thank you. Our next question is coming from Henry Coffey of Ferris, Baker Watts.

Good morning, David. When does the market really get robust and we start seeing kind of an acceleration in loan volumes from people like yourselves and the other companies we work with? So far everyone's been complaining about pricing, basically saying that the borrowers and the sellers really haven't gotten it yet.

I think that's true on the LBOs. LBOs are much like the housing marketplace, that is, the owner of the business saying, gee, prices have gone down, they're offering me two, five, $10 million less than I thought I was going to get. I'll just hang on to my business for a little bit longer and the marketplace will come back. There are a lot of folks that have denied the change in the marketplace in the sense that they think it's permanent, and much like a home owner who wants to sell their house and had original vision are selling it for a million dollars and now are being shown prices at $750,000, they're just willing to hang on to it for a little longer. For those who have been looking that it for six months or so, and getting a little antsy, they'll start to sell, just like in the home business. You've seen home sales move up some.

So as a result, I think, Henry, you're going to see after the holidays a pretty big push in terms of number of deals that go through, simply because I think the owners are saying to themselves, gee, it could get worse. I don't know what's going on in the marketplace, so therefore I'm going to take the X dollars, even though it's less than I expected to get, and I'm going to head to Florida and start playing golf rather than waiting around for another year or two to try to figure out whether I'm going to get my full price or not. I think it's just a matter of time. This is not going to be any tidal wave that's going to come. These are going to break loose just like they will in the housing marketplace, so over the next six months to a year you're going to see the volume continue to increase as more and more people decide that selling for $18 million rather than $20 million is not so bad and go ahead and unload their company and move on.

So in terms of your lending volumes at GLAD or your investing volumes at GAIN, it's more of probably a March-June event when volumes start to become more robust?

Volumes are already up considerably, and terms and conditions are considerably better, at least in the loans that we've been making. I can't answer for the whole industry because I haven't talked to many of them but we're seeing considerably higher volume than we've seen any time in the last 2.5 years. And the volume is coming from two sources. One being the banks who call up and say we have a borrower who wants $15 million. We can only get to $10 million based on the financials. Would you be interested in a $5 million second lien? We look at those, and then the second of all, we get calls from the LBO funds who are in the process of refinancing some of the existing holdings in order to get them in better shape.

We get that call and are able to put second liens and first liens in some cases in place. But you're right, we're not getting the huge number of calls that we'd get from an avalanche of companies for sale. But there's a good number out there that are coming through now, and I just think that after the holidays, people are going to celebrate the holidays and then they're going to think, gee, maybe I should sell my business at this price and move on.

Thank you, sir.

Next question.

Our next question coming from Scott Valentin of Friedman, Billings, Ramsey.

Thanks for taking the follow-up. In terms of -- sounds like conditions are improving, spreads are widening, covenants getting better. Are there any players out there who are behaving recklessly or has everyone pretty much come in line and gotten more disciplined?

I can say that we're holding our discipline. I can't really speak for the marketplace. I haven't seen any crazy deals. During the last two years have seen some enormously stupid investments made by people, that was our appraisal, but some people do go to Las Vegas and make money and come back home a winner. So some of these people that paid too much and done unusual deals may come out after all. I can't really judge them except to say that I wouldn't do a transaction like that and I don't think any of the hedge funds that were interested in being in this business, I think most of them have receded. Those seem to be the ones that had the most unusual terms and conditions that they put forward, and we don't see them in the marketplace today.

But your BDC peers seem to be pretty rational?

I can't speak for my BDC peers, I can only speak for myself, Scott. I'm sorry.

No problem, thanks, David.

(OPERATOR INSTRUCTIONS). Mr. Gladstone, there are no further questions at this time.

All right, thank you all so much, and I hope you have a happy holidays, and we'll see you then later next year. Good-bye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.