Gladstone Capital Corp (GLAD) 2008 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Gladstone Capital first quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode, and 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 and CEO of Gladstone Capital. Thank you. Mr. Gladstone, you may now begin.

Well, thank you, Jackie. This is the quarterly conference call for shareholders and analysts for Gladstone Capital, trading symbol GLAD. Thank you all for calling in. We're happy to talk to shareholders, and when you're in the McLean area, you have an open invitation to stop by and say hello. You'll see some of the finest people in the business. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the Company. These forward-looking statements inherently involve certain risks and uncertainties, and even though they're 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 filings we file with the Securities and Exchange Commission and can be found on our website at gladstonecapital.com and also on 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 December 31, 2007 was a good quarter for our Company in terms of increasing our assets. It was another volatile one, obviously, for the financial market place. We invested about $73 million this quarter, of which $58 million went to five new portfolio companies and the remaining $15 million was to existing portfolio companies in the form of additional investments or draws on our revolving facilities that we provide them. During the quarter, we received repayments of about $4 million due to the normal amortization paydowns of our revolvers. This resulted in net production of about $69 million for the quarter. At the end of the quarter our investment portfolio was valued at about $414 million and our cost basis was approximately $425 million. Although the portfolio was depreciated, our portfolio was fair valued at approximately 97% of cost. We believe this to be a good indicator of the high quality of investments in our portfolio. At December 31, 2007, we invested $13.9 million in one new non-syndicated loan and also about $700,000 in an additional revolver draw to our companies.

Since inception, we've made loans to approximately 125 companies and we've paid or exited from 60 of those companies, and [Danya], our deputy CFO, tells me that the average return of the exits has been about 12% for the syndicated loans and about 16% for our non-syndicated loans. At the end of the quarter, we had two loans past due; one with a cost basis of $2.4 million and the other with a cost base of $6.6 million. We should have one of them fixed very quickly here and the other one back on track in a quarter or so. So, it's about 2.1% on a cost basis of the portfolio that's past due. To date, all of our investments have had a positive IR and our hope is that that'll be true in the future, as well.

This all leads us to say that the program was set up in the founding of the Company and as we continue to mature, is performing as planned, and we don't have any neces -- any need to change the strategy. We have seen a noticeable change in the opportunities coming our way. Banks are calling us to help them with some of the loans that they're making to small and medium-sized businesses and so are the LBO funds, so a lot of influx. The pipeline is probably as strong as it's ever been in the history of the Company. So I would say that the market has finally come back our way and we intend to make some good loans during this time period.

Our balance sheet is strong. At quarter end, we had approximately $162 million borrowed on the line of credit and we have $266 million in equity, so we're less than one-to-one leverage. This is very conservative in the balance sheets of finance companies and the risk profile we believe is relatively low. On the income statement side, for December quarter net investment income, which is before appreciation, depreciation, gains and losses, was about $7.3 million versus $5.2 million for the same quarter last year. That's an increase of about 41%.

On a per share basis, net investment income for the quarter was about $0.43 a share for the quarter compared with $0.42 for the same quarter a year ago. This per share basis is an increase of about 2% and that low increase is attributable to the dilution from the shares issued during the quarter, or in other words, an additional 4.7 million weighted average shares outstanding as compared with the same period last year. I think this shows great strength when we increase your equity by about 23% and don't have dilution of our earnings. As all of you know, net investment income is the most important number to us because it's the number that is closest to our taxable income and taxable income is the income number we use to pay our dividends. So, this is the one to watch.

Now, let's switch over to unrealized and realized gains. This is a mixture of appreciation, depreciation, gains and losses, and we like to talk about it in two categories. First, gains and losses because they are cash items, and then second we talk about appreciation and depreciation which are noncash items. For the quarter ending December, we had a small capital loss of about $6,000 and that's from the proceeds of our interest rate cap agreement. And from the unrealized depreciation report during the quarter, ending is primarily determined by our use of the opinion of the value of our loans that we received from Standard & Poor's security valuation service, or S&P as we call them. It does a good job of setting the price on loans that they price. They have a good experience in this area because the S&P organization follows thousands of loans.

We ask S&P to value all of these loans in our portfolio, and especially the ones that don't have readily determinable market value, and they do that every quarter. We believe this is -- we are the only business development company that does this. S&P gives us an independent opinion of the exact dollar value for each loan that we ask them to review. This eliminates the worry of our shareholders may have that we're not writing-down poorly performing loans. We think it's good for shareholders to have an independent party giving them an opinion on the value of loans rather than the adviser or the management company telling you, the shareholders, what it's worth. And of course, our board oversees this determination of fair value.

So, a lot of nonmanagement people are involved in the determining of the value of our private portfolio and I think this should give you a good assurances. Because of this valuation from the independent third parties, you'll see a lot of volatility in the numbers. At this time last year, our portfolio was just slightly below par, where this December, our portfolio was valued at a depreciated value, due mainly in part to the instability in the loan marketplace. You'll see that our overall portfolio has held its value at about 97% of par, further demonstrating our investment quality. For the quarter ending December, our assets had a net unrealized appreciation in total of about $5.4 million as compared to a prior year, which was a net unrealized depreciation of about $1 million. From the quarter ending September to the quarter ending December 31st, we saw the value of the portfolio change from about 98% of par to 97% of par, or about a 1% depreciation.

As you know, depreciation does not have an impact on the ability of the Company to pay distributions to shareholders. All of our loans, except two, are paying as agreed, but S&P thought there was a need for some depreciation in some of the loans, so they wrote them down. If you ask someone like S&P to value your portfolio, you should expect some volatility because the technique being used here is the value of the loan, what it could be sold for on a single date. Now this is a much harsher technique than used by other funds that use a liquidation analysis, which says that if the business is sold that you made a loan to, would the loan be repaid, and if the answer to that is yes, then the loan is valued at par. That technique is called an enterprise value method. But all of these valuations are just guesses, and until one tries to sell a loan, you don't really know what it's worth. But I think the value is -- that's placed on the portfolio is a fair one.

Bottom line, now we turn to the net increase of net assets resulting from operations. This term is a combination of net investment income, appreciation, depreciation, gains and losses. It adds up everything, kind of like adding apples, oranges and tomatoes together to come up with a number. For the December quarter, this number was about $1.9 million versus $4.2 million this time last year at this time. This December quarter we are about $0.11 a share versus last year at $0.34 a share, a decrease of about 68% per share, all due to the panic in the marketplace, so loans have been written down. For the quarter that just ended this difference is related to the depreciation of the portfolio at this time. Investors should expect this kind of volatility in the portfolio.

Now paid-in-kind interest, we talk about this every time. It's known as PIK interest and original issue discount, or OID. This is income you have to accrue for your books for tax purposes and then you have to pay it out, but you don't receive the income until much later, sometimes not at all. We call this kind of income phantom income because the company that's doing it does not receive the cash but has to pay out the phantom income. We avoid this as much as we can. This is very important point because there are other BDCs with other large portions of their income from noncash sources and that noncash income has to be paid out of dividends, even though the money has not been received. So they must borrow from the bank to pay their dividends, and we strive not to have any phantom income as part of our portfolio. We seek to have the money we receive from the interest payments be the money that we have available to pay dividends, and this again is a very conservative way to run a business like ours.

During the quarter ending December one of our investments had a provision in their $500,000 loan agreement that gave them the ability to capitalize their monthly interest payment. The PIK interest here is about $4,000 a month. We had about $14,000 in capitalized interest income for the quarter ending December 31, 2007, and none in the prior year period. And we refer it again that this is paid-in-kind, or PIK interest, and it's not much here, but we have a tiny bit of PIK interest. Our average loan rating for the quarter remained relatively unchanged. The risk rating system we use for our non-syndicated loans had an average of 7.3 for this quarter versus an average of 7.1 for the same period last quarter. The portfolio is a little less risky according to our risk rating model. The risk rating we use for unrated syndicated loans was an average of 6.3 for the quarter versus an average of 6.1 for the prior year, December 31st quarter end.

As for our rating of syndicated loans at an average of CCC for this quarter and the prior year -- prior quarter at December 31st. Our risk rating system gives you the probability of default for the portfolio with a scale of zero to ten, with zero representing high probability of default and ten, of course, a much lower risk of default. The risk we see here is staying relatively low and pretty much unchanged from quarter to quarter. We're quite satisfied with the current portfolio mix. Most of you know we sold from our shelf registration an additional 2.5 million shares of common stock on October 19, 2007 at a price of $18.70 per share. In November, the underwriters exercised its option to buy an additional 375,000 shares at the same price. This yielded us approximately $50.5 million in net proceeds to go to our equity, all of which were used to repay borrowings outstanding on our line of credit, and we'll use that ability to borrow on that line of credit to continue increasing our asset base. So we increased our equity by about 23%, which is a lot.

After December 31, 2007, we invested $13.9 million in new loan originations and funded additional revolvers of about $700,000. We also received about $675,000 of scheduled loan amortization payments. Needless to say, we're very pleased with the results for the first quarter of our 2008 fiscal year. And yesterday, on February 5th, we closed an offering of three million shares of common stock at a price of $17 per share, which yielded us approximately $47.8 million of net proceeds, all of which we -- is used to repay a portion of our borrowings outstanding on our line of credit. We do not know if the underwriters of the offering will exercise the over-allotment offering option. We now have about $314 million in equity and we'll be expanding our line of credit so we can continue to grow our base of loans. If you make the assumption that we have $314 million in equity and we can move our asset base up to about $429 million -- from about $429 to about $628 million, that's a 46% increase and that's very significant.

Well, since I last talked to you folks last quarter, the senior and subdebt marketplace for the large middle market companies has had tremendous liquidity problems. For a while the market was closed, that is there were no buyers of senior syndicated loans, but now there are transactions happening and then sales of some of the sold transactions, but it's still going very slow. And as you probably read in the newspaper, some of the new ones that were going to come to marketplace haven't come. As you know, we have bought in the past some of these first and second-lien loans when the companies issued them. We've been selling some of those senior syndicated loans to make room for non-syndicated loans at higher rates of interest income. But with the panic this summer and the stagnation this fall, our rates have changed and now the loans are worth a bit less than the face of the loans, so in order to sell them, we'd have to take a small loss.

We often weigh the alternative of selling some and have loss with raising money by selling stock. It's a question we ask ourselves often. We have about $76 million at our cost basis in senior and second-lien syndicated loans. For senior syndicated loans at $200 million or larger, rates were at about 2% to 2.5% added to LIBOR. Now it seems they're running at about 4%, sometimes 5% added to LIBOR. Because these new loans are at a better rate, this causes the old loans to be at a lower market price. But if we hold the loans until they mature, they'll pay off and we should get 100% back with no losses. Now these syndicated loans are paying as agreed, so we'd hate to sell them and take a loss. At any rate, that's the story on that area.

By the way, LIBOR is the London interbank rate, which is the leading indicator of short-term rates, and the norm for LIBOR has traditionally been 5% to 6% range. It's now running at 3.2%, so it's relatively low and the cost to borrow money for most companies has come down some. That's for larger companies that we help finance. And the demand for these loans in the big capital marketplace by nonbank lenders, like hedge funds and bond funds, for rated loans is still very, very low. There are very few buyers of these loans today.

For our small companies and their loans, the world is certainly different. The small loan marketplace we invest in is not seeing much competition from banks. Many banks have tightened up on their credit standards. Most banks don't want to make the kind of loans that we make and we're often called by banks to help them. They do the first lien and we do the second. We have to compete for our loans with other small private lenders, like mezzanine loan funds and a few small hedge funds and some of the smaller BDCs. Our loan request pipeline, as I mentioned before, is very strong. It's stronger than it's been in the history of the Company. And we see a very strong outlook, as it may materialize into more loans for us as we'll see what happens next quarter.

Our goal is to be a strong, profitable Company and not the biggest, so we're emphasizing profitability and not growth. And we do concentrate on variable rate loans so that we're not hurt by rates if they increase. And while our rates are variable, we often have a minimum and rate change, so that we don't have any decline in interest rates hurt our ability to pay dividends. These are called floors in our business, so that the floor is set at a certain level and they don't go below that. We have floors set at 9.5% and 10%. At December 31, 2007, we have three fixed rate loans at a cost basis of about $16.6 million, or approximately 4% of the cost basis of our portfolio. We have in place an interest rate cap to cover any fixed rate loans, and this is commonly called a derivative. The cap on the rates will help protect us against any increase should rates start to go the other way on our fixed rate loans. We're well protected against future rate increases.

We continue to worry about the cost of oil, the problems in the world, especially the Middle East. High oil prices take money out of the pockets of our middle class here in the United States and they don't have money for restaurants, to buy durable or nondurable goods, so -- and they certainly have no money to save for a rainy day, so we worry about that. We're no longer worried about inflation. It may come back in 2009 or 2010, but certainly not here today. The amount of money being spent on the war in Iraq is hurting our economy. We all support our troops. They're the true heroes of this period of history and risking their lives for us, and I hope they all come home soon.

Even worse than some of the things I've mentioned is the pork barrel spending by federal, state and local governments. They're just all out of control. In the '30s, total government spending compared to all spending was about 12% after the New Deal and Roosevelt and implemented some -- and implemented some very significant government spending and it rose to about 22% of the spending in 1947. And then in 2006 it's now risen to 44% of the national income and it's growing at four times faster than the economy. And certainly in a few years we'll be officially a socialist economy, with more than 50% of national income being spent by the government. This excess in taxing and spending on the part of government causes a great deal of dislocation in the economy and it certainly killed the dollar in terms of other currencies like the Euro.

The trade deficit with China is still very troublesome and hurting our companies and our country. China continues to subsidize their industries and it's to the disadvantage of our businesses. And we wonder how much the impact on the downturn in the housing industry and the related disaster in the home mortgage defaults is going to have on the rest of the economy. No one knows how many of the home mortgages will fail. We originally thought it would be more. Not more than about $200 billion in terms of a problem, We've revised that estimate up to about $400 billion now. That is enough to cause a slowdown in the economy, but I still believe it's not enough to cause a recession. The internet bubble was somewhere like a $7 trillion loss of equity and that certainly was a recession.

Home mortgages are backed by a home and there'll always be some value to the house. That's very different from the internet companies that, when they got in trouble sort of blew away with zero for equity and many of their debt holders. Also, much of the housing trade is out of work and I'm not sure the numbers that the government gives us on unemployment are a fair number, because many of the workers in the housing business were here without U.S. visas. And I'm not sure we have a good number on the unemployment right now. In spite of all of those negatives, the industrial base of the U.S. is still very strong. Small businesses kept their cost low. Profits are not going up as much as they were in the past, but they're still going up. Manufacturing is not operating at full capacity so they've got room to grow. However, we do see some slowdown in hiring and we do see some backlogs that have come down some, but not anything close to a recession.

Our dividend is $0.14 a month for the first fiscal half of the year. The run rate is about $1.68 per year. We'll see our second fiscal half play out and determine what -- at the next board meeting what our directors want to do with regard to our dividend. At this dividend rate and with the stock price at about $16.88 yesterday, the yield on the stock now is 10%. The stock came down as the new stock sale was -- occurred, but it really shouldn't have. We'll put the money to work and given the strong pipeline of loan applications, we should do fine there. The new shares we sold this fall all were fully invested and that's the reason we had the second offering in January.

There was little dilution to the earnings, as you heard. We actually increased earnings per share after issuing that much equity, and I think the same will be true for the money we raised in January. We're generating a good return on new loans and it's higher than the yield on the stock we are selling. In addition, we should be able to borrow up to 40%, 50% of the amount that we're lending to our portfolio companies and the interest rate is lower on the money that we're borrowing. So that spread as it is today is a very positive spread and extra income to our Company.

And this is the way that we're going forward. Please go to the website and sign up for e-mail notification service. We don't send out junk. You can sign up for our newsletter at gladstonemanagement.com. We have some great job openings for senior and entry-level positions, so please send over your resumes. As far as we can see now, the economy looks okay, but we can only see a couple of quarters out and we want to be careful. We are, of course, stewards of your money and we'll stay the course and continue to be conservative in our investment approach. We have not, in the past, invested in housing or in mortgages -- home mortgages and we don't intend to do that in the future, so we'll continue to be very conservative in our approach.

We'll now open up the call for some questions and so, Jackie, if you'll come back on, that would be great.

Thank you. (OPERATOR INSTRUCTIONS) Thank you. Our first question is coming from Vernon Plack of BB&T Capital Markets.

Thank you very much. David, just curious, in terms of your debt-to-equity ratio in this type of environment, any thoughts in terms of how leveraged you would actually like to take the portfolio?

I don't think one-to-one is bad in this economy. We have a very nice loan portfolio. It's performing very well, so I don't feel uncomfortable if we can leverage all the way up to one-to-one. We never really seem to get quite to one-to-one. We get to about 40%, 45%, in essence, not quite one-to-one in that situation before we usually need to raise equity. That's what happened to us as we were coming into December. And so I don't feel com -- uncomfortable doing that.

Okay. One other question as it relates to asset quality. We've seen asset quality fall a little across the board in this industry, which is not unexpected. Just curious in terms of your thoughts, the nonperformers are a part of the business and that number will -- at least the thought is it will likely go up. What are your thoughts on that, at least for the next 12 months?

Over the past six years, we've had nonperformers that would come in and we would fix them or sell them or do something to rid ourselves of the problem. And I think if you're a good workout team and you have good people in that side of the business, while you'll get some nonperformers, you're able to fix them and sell them or liquidate them or do something in order to avoid losses. As you know, we've had one loss. I'm not sure how many workouts we've had over the last six years. It hasn't been that many and the nonperformers have certainly been low. We've had one loss on one loan, $1 million out of 14, and we received so much money at the beginning of that period that -- with that loan that we had a positive internal rate of return. I don't know that we can maintain that over a significant long downturn. But I do know, based on my past experience of being through the '81 recession, the '90 recession, the '01 recessions, that the portfolio has performed and we've not had any demunition in our ability to pay dividends. And in fact, the two that we have nonperforming now didn't pay interest during some past periods so we've not had a problem meeting our dividends.

We'll fix those and move them over and take the money that we get out of that and put it into income producers, so it'll actually be very positive when we move them across. I just don't think the portfolio, at this stage -- again, given the fact that this doesn't seem like a big recession -- is going to have that many problems. We've seen -- 1990 was probably the worst recession I've been through. We would see nonperformers balloon up between 5% and 10%, but losses still remained under 1%, which is the real asset test is how much did you lose. May have a problem with a loan, but if you can fix it and bring it back to interest paying, the question of losses then becomes pretty low on your priority of things to look at if it's really low. So, I don't know, Vernon. This feels like a very mild downturn to me. I don't see a real recession in terms of government statistics. And so I think the asset quality will perform quite well through this next period.

Thank you, David.

Next question, please.

(OPERATOR INSTRUCTIONS) Our next question is coming from Kenneth James of Robert W. Baird.

Hi, good morning.

Good morning.

I was wondering if you could just give a little bit more detail on your nonaccruals, particularly the new one? I'm assuming the other one you mentioned was the one that was previously purchased that's been around for a couple of quarters.

The new one is a company that -- we really didn't expect that much. The LBO fund is working it hard and my hope is and we've been told that end of February we'll have some resolution to what's going on and that's about all I can say. We don't like to spend a lot of time talking about them for the simple reason that we have what's known as confidentiality agreements with these companies and they're private. We're not supposed to spend a lot of time talking about the details. But it's a new one. I think we're well covered. I think we'll get our money back, and so I'm not that worried about it. and we'll probably get all of our accrued interest. But who knows. It's a marketplace that you just never know until you've gone through the whole routine of fixing it before you come out the other side and know whether you've made money or lost money.

Okay, great. I just wanted to check there, because you seem like you feel pretty good about a near-term resolution there.

I do.

Okay. And then in terms of the levels of originations this quarter and then also your recent need to raise capital again, can I extrapolate from that that we could be looking at this level of originations to persist here for at least the next quarter or two?

Well, certainly, the opportunities are there. As I mentioned in the prepared part of the presentation, the backlog is as strong as it's ever been. There's still the process of going through the analysis and due diligence of the business that takes up a considerable amount of time and sometimes it goes quickly and sometimes it goes slow. But the bottom line of it is we do have a very robust pipeline. We're having banks call us now that hadn't called in awhile and a lot of small businesses calling us and the LBO funds are calling us. So, with interest rates going up much higher and with the opportunity to pick up some equity-type positions in these companies, I think it'll be a very profitable -- maybe not a quarter-by-quarter analysis but I would say every six months, you should expect a pretty good increase. Again, it's very hard to tell. Even though you have a robust pipeline and it's bigger than it was last quarter by a quantum amount, there's no way of knowing until you have delved in these companies whether you're going to be able to go forward or not. So, I'd say I'm optimistic that it'll be robust, but just don't want to give you a concrete projection.

Okay, fair enough. And what about the headwind you've been facing from when elevated repayment activity dropped off significantly this quarter. When do you think this is a more normalized level, just normal amortization that we'd see here in the near term or was this quarter, you think, especially low?

Well, it was a very nice low quarter and I think you're going to see that going forward. Obviously, the loans that we have on the books that are, say, 200 or 300 over LIBOR aren't going to be refinanced and the ones -- the second liens that we have at much higher rates are not going to be financed easily because the rates have all moved up in that. So the new loans that we're putting on the books are substantially higher and that does have a barrier to getting anything refinanced, because people don't want to pay more interest and refinancing would cause them to pay a significant amount of interest. We do have some of those lower-yielding loans, the businesses do get sold and when they get sold, of course, we get paid off. And while I'm very delighted to have new money to put out at a much higher rate, you hate to see anything get paid off, but we'll just have to see how that shakes out. I think the payoffs will be substantially less in the coming year than they've been in prior years.

Okay. And then one final question. On the fees this quarter or the fee credit, was there any outsize or extra activities by the management company for portfolio companies that generated fees that were credited back to fund that made that number a little larger than it had been this quarter?

Yes, there were a couple of things. With all of the closings that went on, we do get a fee when we close a loan and with all of those closings, we had about $820,000 of what we call investment banking fees that were credited back, so that's inside that $2.4 million -- is that the right number. 2.4 -- the $2.4 million. We also had, as you know, our senior syndicated loans. We only charge 0.5%. That's an ongoing thing and that was not that much, about $103,000. The incentive fee that was given back was about $1.46 million, so that was a significant part of the give back. And we're projecting that during -- maybe not by the end of this fiscal year, which is September 30, but probably by this time next year we'll be pretty much have grown out of the give back for the incentive fee and we should be in a very good position.

Okay. Thank you very much.

Another questions?

Thank you. Our next question is coming from John Suma of FBR.

Good morning, David. Thank you for taking my question. Can you provide a little context or any changes in the motivations of the companies that seek to borrow from you? Have you seen any inflections or the type of customer that's coming to you to borrow?

I think the quality is still more or less the same. We've been very picky over the period of time as to who we'll lend to. But the pipeline has not changed that much in terms of what we see. Normally in a downturn or a recession period, we'll see companies that significant financial problems. For example, in 2001, we would see companies that needed to meet payroll next month and next week and didn't have the money to do it, or we saw companies that didn't have any backlog but wanted you to lend to them so they could build a backlog, and other companies that were in significant problems. We're just not seeing that coming in the door today and so that's another reason for saying we don't think there is a recession on the horizon. The classic for us is the car dealership who comes in who's out of trust on their car loans -- on their full plan for their cars and they need to raise money in order to pay the bank. That is, they've sold the car but they didn't pay the bank and used the money for operating capital. We're not seeing any of that.

So, your question is right on point in terms of what are we seeing? Is it really rugged out there or are we just seeing a lot of good businesses that now can't get finance from the cheap money that they got before when banks were doling out a lot of money at low rates and at very low terms -- very easy terms, kind of like the home mortgage business, or is this a real downturn in the economy. We're just not seeing it. So, my perception of the world is maybe a bit jaundice in the sense that we're just not seeing the problems and maybe they're out there and they're just not showing up on our doorstep, but I doubt it. We normally see literally thousands of businesses and to date they're not these very difficult situations coming in the door.

Okay. In that same vain as we've talked about banks exiting the space and therefore you garnering with your capital being able to leverage that for incremental opportunities, when we start talking about growing your business and we start talking about expanding your lines of credit, can you talk about the willingness of banks then to turn around and lend to you? It seems -- I just want to make sure that -- obviously this vacation of capital is providing an opportunity, but are you, too, still being able to access the amount of debt in order to meet some of the growth objectives that you've set in front you - in front of us today?

Well, I can only speak -- as you know, Gladstone Investment had its credit renewed -- was that in October last year, which was a pretty rough period, and so it had its line of credit renewed and didn't need to raise additional capital. But the bank that was the lead there renewed and we've got just fine for another year. In this Company, we've not increased the line of credit beyond the $220 million that we have, but we do have a $30 million request that seems to be approved. We haven't needed to draw it down quite yet. And we do have a couple of banks that are looking to join the syndicate, hopefully that would raise another $50 million to $100 million. So, our goal here is just to continue to grow it. I think the banks have not pulled out of the marketplace. They're sticking with the guys that they're in with today, but they're just not taking on a lot of new business, as far as our type of borrowing. As far as the other banks out in the marketplace, many of the banks have not gone away from the marketplace, but what they've done is they've tightened their standards. They used to lend three-and-a-half times EBITDA, they're now lending two-and-a-half, so they've just pulled back as to what they will do in this credit tightening environment.

So, I think if you look at what's going on in the marketplace and couched it in different terms, that is the banks are not exiting but there's a, A, a flight to quality. and B, a tightening of the terms and they're charging a little more interest. We had our interest rate go up from about -- I think it was 80 basis points to 120 in the investment company and I think it'll go up here about the same amount, so we'll have an increase. But given the fact that we've moved on our senior debt from about 250 to 450 -- just approved one the other day at 550 over LIBOR -- we're maintaining much larger spreads than we had in the so-called frothy time when the banks were out there. I think we're okay as far as being able to borrow, but one never knows and that's another unknown out there. To date, we seem to be doing just fine.

Great. Thank you. One last question. As we start looking at the nonaccruals, and I know that you're senior secured, the market value of those seems to be at about 70% of the cost basis of the loan or par value of the loan. Does that mark, in and of itself, reflect a recovery rate from S&P and their methodology, or does that represent what you might think would be a potential exit value? And I know you don't take the market value and -- you take the market that S&P provides, but I'm wondering if you could provide a little bit of context to how those -- how we should be interpreting those marks, whether it is a recovery value or market value and how to interpret that?

From my understanding of S&P, this is the value that they believe the loan could be sold for on the last day of the quarter. So they're giving you a sale figure and that doesn't have any recovery number on it. All of these loans are secured with liens on the assets, so I'm I'm assuming they're just looking at their portfolio and saying what are loans trading at today that are similar to this and coming up with a value.

Great. Thank you, David.

Okay, next question.

Thank you. Our next question is coming from Daniel Furtado of Jefferies & Co.

Good morning, David.

Good morning.

Just two quick questions. One is just an update on your thoughts on the relationship between the credit for the management fee and the dividend. Do you -- do you foresee a situation in which you wouldn't be fully crediting the entire -- you would not be crediting that fee but still raising the dividend, or do you have to come true-up on that fee before you envision a dividend increase?

Well, this is a discussion we have with the board and where we're going on this is some kind of sharing as we go through this period of time. So I can't give you what's going to happen in the future with regard to the dividend because I don't read the minds of my board members, but my guess is we'll come to some understanding. As long as we're giving back 100% of it, there's no room to play and that's what we did this last time. Once you got to -- let's say, use an example to -- on giving back only part of it, you could give back a little bit more and have the dividend increase and you could share over a year's period in the lessening of the abil -- need to give back and it would make the dividend go up. So, the answer is yes, the dividend can go up during this period of time when the incentive fee is not being paid, but it has to go up. It'll go up slower than it would if you didn't have to do that at all.

Understood. Understood. And then I asked this on the game call and I just want to make sure that it's similar at GLAD, and that the FAS 157 and 159 changes that are about a quarter away, you don't foresee a meaningful impact to your valuations or any more volatility toward [back value] because of these?

Well, I've got four accountants sitting here and they're all shaking their heads no so I'm assuming 157 and 159 and all those others are not having an impact on us.

Excellent. Thank you.

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

All right, we thank you all for calling in. We appreciate it and we'll do our best to make you happy next quarter. Thank you all for calling in.

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