Gladstone Capital Corp (GLAD) 2008 Q4 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Gladstone Capital fourth quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. A 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 for Gladstone Capital. Thank you, Mr. Gladstone, you may begin.

Thank you, Claudia. Hello and good morning to all of you out there in listeners land. This is the quarterly conference call for the shareholders and also analysts of Gladstone Capital, trading on NASDAQ symbol GLAD. We certainly thank you all for calling in. We are always happy to talk to shareholders about our Company, and we wish we could do this a lot more often.

I hope you all sign up for the e-mail notices so you get information coming directly to you from the Company, and please remember that if you are in the Washington DC. area and you have time, come by and stop and see us in McLean, Virginia. We are just outside Washington DC. You have an open invitation to come by and say hello. You will see some of the finest people in the business.

Now I need to read this statement. 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, even though they are based on our current plans, and we certainly 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-Q filings, and our prospectus that is filed with the Securities and Exchange Commission. That can be found on our website at www.GladstoneCapital.com, and also on the SEC website. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether was a result of new information, future events, or otherwise.

Well those of you on the call last name know that we started a new way of reporting to you, so that you can hear from some of these great team members that we have here working at the Company other than just me. I have no plans of leaving, and neither does Terry Brubaker or any of the others, but we would like you to hear from some of the talented team members we have here at the Company. We think shareholders should hear from them as well as just me.

We will start with the President of the Company, Chip Stelljes, Chip is also the Chief Investment Officer, and he will cover a lot of ground for us. Take it away, Chip.

Thanks David. We continue to operate in a very difficult environment from an economic financial sector and investment perspective. Through the third quarter the environment worsened for making new investments, because of the uncertainty of the economy, while the longer term prospects and our pipeline remain strong, the continued instability of the financial and lending markets made the closing of investments more difficult and time consuming this past quarter.

That being said, new investment production for the fourth quarter ended September 30 improved over the prior quarter, with $39 million in new investments closed. Of the $39 million invested this quarter, $33 million went into three new portfolio companies, and the remaining $6 million into existing portfolio companies, in the form of additional investments or draws on revolver facilities.

During the quarter we received repayments of approximately $23 million due to loan pay-offs, investment sales, and normal amortization and paydowns of revolvers. This resulted in a net production increase of $16 million for the quarter. Since the end of the quarter, we have made about $8 million in additional investments in existing portfolio companies. Our pipeline continues to be strong.

We continue to see a noticeable change in the opportunities coming to us. Banks and buyout funds are calling us aggressively, because so many lenders are no longer investing. Pricing and structure continued to improve for us. If we can keep moving, we can make some strong loans during this time frame.

The net increase in investments this quarter was only $16 million, due to prepayments and repayments, however this can be good if it enables us to reinvest the funds into higher yielding opportunities. We continue to look at ways to increase the yield on the existing funds. Our pipeline of investments as I said is large. We have to convert the opportunities into new investments. We can reach our objectives in a short run, but we will need to be confident that we understand the economic cycle ahead of us, and have the capital to pursue the pipeline opportunities.

At the end of September quarter, our investment portfolio was valued at approximately $408 million, versus a cost basis of $461 million, meaning our portfolio was fair valued at approximately 89% of cost. The depreciation for the quarter was about 4%, and we don't like the lower valuation of the portfolio during the quarter, given the strong performance of the underlying investments, and remain confident that the valuation is reflective of the broader market for loans, rather than any substantial change in our portfolio.

There are so many loans being sold by banks and hedge funds, that the market is more like a fire sale market rather than an orderly one. The use of fair value comes into suspect when there are forced sellers and limited buyers. That being said, we expect most of the portfolio to continue paying as agreed, with few problems through the near term, however we are watching our portfolio come these revenues and backlog very carefully, to judge where we think the underlying companies are headed. At the end of the quarter we had three loans on non-accrual with cost basis of $6.6 million, $6 million, and $0.5 million. We are in control of two of the three companies, and are working aggressively to fix the companies, and improve their profitability.

Two of these situations required new management, as the issues were more company-specific, and not necessarily due to the tough economy. We now have new management teams in place to help us turn these two around, and we are beginning to see results. We feel good that we only have three loans on non-accrual out of the 63 companies. On a dollar basis, the non-accrual loans have a cost basis of $13.1 million, or less than 3% of the cost basis of all loans in our portfolio. Again, a good statistic for such a difficult time.

We continue to concentrate on variable-rate loans, so that we participate when rates increase, while our rates are variable, they often have a minimum rate or floor, so that declining interest rates are mitigated. About 71% of our loans have floors, and fortunately 29% of our loans do not have floors, and with floating rates down we have been generating less income there. At September 30, 2008, we have two fixed rate loans with a cost basis of $13.9 million, or approximately 3% of the cost basis of our total portfolio of loans in investments.

All of our fully exited investments have had a positive internal rate of return. We may have some losses in the future, but as you know, we work hard to keep them to a minimum. And in another measure of the quality of our assets, our average loan ratings for the quarter that just ended remained relatively unchanged.

The risk rating system we use for our non-syndicated loans showed an average of 7.3 for the quarter, and for the same prior year quarter. The risk profile has remained constant according to our risk rating model, and to us that's a good sign. The average rating for unrated syndicated loans was 6.6 for the quarter, versus an average of 6.0 for the prior year's quarter, so a nice increase there.

As for our rated syndicated loans, they had an average rating of CCC+ or CAA1 for the quarter and prior year quarter. Our risk rating system gives you a probability of default rating for the portfolio with a scale of zero to 10, with zero representing a high probability of default, and the risks that we see here staying relatively low. We are quite satisfied with our current portfolio mix.

In addition to the solid quality of assets, the quality of our income is also very good. As we have discussed before, some companies structure investments with paid in kind, or original issue discount structures. This generates non-cash income which has to be accrued for book and tax, that is not received until much later, and as we all know sometimes not at all. This income is subject to our 90% pay-out requirement, so the Company does not receive the cash, but has to pay out the income, and we avoided these structures for this reason.

This is important because other BDCs derive significant income from non-cash sources, and that non-cash income has to be paid out as a dividend, even though the cash has not been received. So they must borrow from banks or raise equity capital to pay their dividend. We strive to avoid non-cash income as part of our portfolio. We seeked out the money we actually received from interest payments being the money that is available to pay out in dividends, and we think this is the right way to run a business like ours. One of the acquired investments that we have had a provision in their loan of $700,000, that gave them the ability to capitalize their monthly interest payments.

The PIK interest here is about $5,000 a month, there were no other investments in the quarter ended September that had a similar provision. We had about $16,000 in capitalized interest income for the quarter ended September 30, 2008, and had none in the prior year period. We have a negligible amount of PIK interest and no original discount issues.

Since inception we have made loans to approximately 132 companies. We have been repaid or exited from 69 companies. The average returns of the exits has been about 13% for syndicated loans, and about 16% for non-syndicated loans. We have this month a seven year great track record. We hope to continue it in this new fiscal year.

Since last quarter the senior and subordinated debt marketplace for larger and middle market companies has continued to have tremendous liquidity problems. For a while the market was closed altogether. There just were no buyers. Now there are new transactions and some sales of old transactions. As you know we buy some of the first and second lien loans when the companies issue them. We have got about $77 million at our cost basis in senior and second lien syndicated loans today. This is where most of our variable-rate loans without floors exist, and these loans have seen their values decline more than some of the others.

The market pricing for the larger middle market loans continues to change. For senior syndicated loans of $200 million are larger, last year rates were about 2.5% over LIBOR, LIBOR of course is the lending interbank rate, which is recognized as the leading indicator of short-term corporate rates. Now they seem to be closer to 6% over or more, because these new loans are at a higher spread this causes the old loans to command a lower market price, however if we hold these loans to maturity, we should get 100% of our capital back with no loss. All but one of these syndicate loans is paying as agreed.

In addition to widening spreads over LIBOR, the norm for LIBOR has traditionally been about 5 to 6%, with approximately 2.5% at September 30, 2008, about 2% or 2.5% today, a drop in LIBOR lowers our income, but if a loan could be obtained, money is relatively low in cost for most companies, so still affordable for the portfolio companies, and that is helpful for the larger companies in which we invest.

The small loan marketplace in which we invest most of our capital has not seen much competition. Many banks tightened up their credit standards. We have to compete for our loans with other BDCs, private lenders like the mezzanine loan funds, a few hedge funds left in the business, and in some of the small business investment companies.

Again, our loan request pipeline is strong, and if we can access capital and get comfortable with the risk and the economic cycle, we see a very strong outlook, which may materialize into more investment for us as the year proceeds. Our goal is to be a strong profitable company, not the biggest company.

And with that I am turning the presentation back to David.

Thanks Chip. That was a very good report. Now let's turn to the financials, and for that we will hear from Gresford Gray, our Chief Financial Officer. Gresford, take it away.

Thanks, David. We will begin with our balance sheet. Our balance sheet remains strong. At year-end we had approximately $151 million borrowed on the line of credit, and we have $272 million in equity, so we are less than one to one leverage. We maintain a very conservative balance sheet for a company like ours, and we believe that our overall risk profile is low.

For the September quarter, net investment income which is before appreciation, depreciation gains or losses, was about $6.1 million, versus $5.7 million for the same quarter last year, an increase of about 7%. On a per share basis, net investment income for the quarter was at about $0.29 per share, as compared to $0.39 for the same quarter one year ago. This was a per share decrease of about 26%, attributable to the dilution from share issuances during the year, or in other words, an additional 6.5 million weighted average shares outstanding, as compared to the same period of the prior year.

Some of this decline should be removed as the money from our last public offering is put to work, but we also have seen LIBOR fall, and for our syndicated loans, that has hurt our earnings as well. So as rates go back up, our income will increase as well. As all of you know, net investment income is the most important number to us, because it the number that is closest to our taxable income, and that taxable income is what we use to pay our dividends.

Now let's turn to unrealized and realized gains. This is a mixture of appreciation, depreciation, gains and losses. We like to talk about two categories in this section. The first category pertains to gains and losses, because they are the cash items, and then second, we will turn to appreciation and depreciation which are the non-cash items. For the quarter ended September, we had a realized capital loss of about $701,000 from the partial sale of one loan.

The unrealized depreciation, the non-cash item reported during the quarter was primarily determined by our use of opinions of value on our loans that we received from Standard & Poor's securities evaluation, or S&P, and they do a good job of giving us their opinions of the prices on our loans. They have good experience in this area, because they follow thousands of loans.

We asked S&P to give us opinions of value for all of the loans in our portfolio, that don't have a readily determinable market value every quarter. S&P gives us an independent opinion of the exact dollar value for each loan we ask them to review. This eliminates the worry our shareholders may have, that we are not writing down poor performing loans. Because this is a valuation opinion from an independent third party, you will see a lot of volatility in this number.

At this time last quarter, our portfolio was just slightly below par, whereas this September, our portfolio was valued at an appreciated amount due mainly in part to the general instability of the loan markets. You will see that overall, our portfolio held it's value at about 89% of par, further demonstrating our investment quality.

For the quarter ended September 2008 and 2007, our assets had net unrealized depreciation of about $19.5 million and $4.9 million respectively. The depreciation was due primarily to the general instability of the loan markets, as I previously mentioned, and to a lesser extent the use of a modified valuation procedure for the Company's non-controlled investments. The change in valuation procedure accounted for about $2.9 million, or 6% of the net unrealized depreciation for the fiscal year ended September 2008. 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 three are paying as agreed, but S&P thought they were in need of some depreciation due to market conditions.

Now let's turn to net increase or decrease in net assets resulting from operations. This term is a combination of net investment income, appreciation, depreciation gains and losses. For the September quarter, we had a net decrease in net assets resulting from operations of about $14.1 million, versus a net increase of about $0.7 million last year this time. This September quarter we earned about negative $0.67 per share, versus last year at positive $0.05 per share. For the quarter that just ended, this difference is primarily related to the depreciation of the portfolio this time, versus the small appreciation of the portfolio last time. Investors should expect this kind of volatility in our portfolio.

And now I would turn the program back over to David. David?

Thank you, Gresford. That is a very good report. I do want to remind all our listeners out there, that valuations are just the best guess that anybody can make. If you probably ask 10 different people what the value of a loan is, you would get 10 different answers. All of our valuations are just general valuations, even the ones provided by Standard & Poor's Security Valuation Inc., and in this fire sale market that we talk about, the market prices are not reflective of the long term values of these loans, but rather the short-term sale value.

I do wish the SEC would relax the fair value rules, so that those of us in the lending business that are not selling our loans, could mark them to the long term value in the market, and not to the short-term fire sale marketplace. I can't understand what value the SEC sees in making us mark our securities to market, that can only be classified as a fire sale market.

Also please note that we renewed our credit agreement with the group of banks not too long ago. It was a very difficult time to have a renewal, but we are happy to say that the group of banks increased our line of credit, and we are in good shape as far as the credit lines can do.

Credit markets is our biggest worry today for this fund. We just hope that things get much better as time goes on, and when it comes time to renew our credit line again in late spring, we do worry a lot about the credit marketplace, and how they will impact us and our portfolio of companies, and if they don't renew, we do have a two year pay-out under our loan, so that wouldn't be the end of the world, and we could also sell off some of our loans and pay them down.

We worry of course these days about oil prices. They are down now to $50 a barrel. I never thought I would be happy that $50 was where oil prices are per barrel, but certainly better than the $140 or so, that we hit at one point in time. We are also no longer worried about inflation, although inflation is the next worry, and it will be back maybe not in 2009, but certainly some time in the near future.

The amount of money being spent on the war in Iraq is certainly hurting the economy. All the team here at your Company supports our troops in Iraq and Afghanistan. They are the true heros in this period of history. They risk their lives every day for us, and I hope they all come home safe.

The spending, the pork barrel spending by Federal, State and local governments is very harmful I think. They have been out of control for years now and it doesn't really matter whether it was Republicans or Democrats. They all seem to have the same approach to things. I hope this new administration that comes in will shut down the pork barrel spending, and use the money for very constructive projects.

The stimulus spending is certainly dislocating a lot of marketplaces. I am not sure how all of this will turn out. It looks like we are partially nationalizing a lot of our businesses, by having the government take ownership positions, and over time, these partial nationalizations or ownerships of our businesses will have to be bought out by raising new equity, so we will have to see how that comes along as time goes on.

All this spending will mean more taxes on our middle class, and the middle class certainly can't stand anymore taxes than they have today, and that will cause even more dislocations in the economy, as we take away spendable income.

Trade deficits with countries like China and other nations is just terrible. China continues to subsidize their industries to the disadvantage of our businesses, and as they subsidize for example, oil and gas prices. China's high growth rate is slowing down, and perhaps they will come back into line as that slows down. They are certainly becoming less of a competitive threat.

We are seeing many of our small businesses build products here in the United States, rather than going to China. I think that is a very healthy sign for our economy. The downturn in the housing industry that we talked about for the last three years is coming. Obviously it has come and had a great impact. It is certainly a disaster in the home business, and the home mortgage defaults are going to continue to hurt our economy.

Certainly no one knows how many home mortgages will fail, but we had originally thought it might be $200 billion problem, that has certainly been revised up to $400 billion, maybe even more than that. There are some estimates that put it into like $1.2 trillion. I think that is way off the charts. But all of this is enough to slowdown the economy. We certainly are not in a depression, but as has been announced by the economic advisors, they have declared us in a recession. The housing problem probably will turnaround during the next 12 months, because housing prices are now falling far enough, so that qualified buyers can step up and buy the houses.

In spite of all these negatives that we come up with, and we talk about the negatives every day, and we certainly see the broadcasters on the news fill our ears with all of the negative news, in spite of all of that the US is not in dire straights. The industrial base is still very strong. The only thing that is hurting us today is a lack of bank lending money to many of the businesses out there. Most banks have just about stopped making loans. Some of the mid-sized banks are certainly making loans, that is collateralized loans but not a lot, and this is just like to me, it is just like 1990 in which we had a failure in the real estate marketplace, and it bled over into all of the rest of the marketplace.

This time, the Federal Government is pouring money into the banking system, but the banks are still not lending. In 1990 you will remember the Federal Government just took over the banks, and sold off the assets. I wish the government would buy some preferred stock in our fund. That would be a great fund, if we could raise some 5% preferred stock. We would certainly turnaround and lend it out.

We have tried to apply to the TARP for some of the TARP money from the bailout Bill, but we were told it is just for banks. I guess they are going to change that over time. They are giving it to insurance companies like AIG, and now of course the auto industry is begging for some of that. If they really wanted to get the economy started, they would put money in small businesses, where 80% of all of the jobs are increased.

I guess the downturn that began last summer is really not going to last much longer. We think the marketplace is stabilizing, and will begin to turn up in the next quarter, perhaps the second quarter of next year. If that is true, it would be a great time for us over the next two years, because two to three years after a recession, we normally get the best opportunities. Also please know that there is a very large amount of money sitting on the sidelines. We talked to one hedge fund that had $14 billion, $13 billion of it was in T-bills, and they are not coming out for a while.

When all of that money finally does come back to the market, the equity market and the debt market will explode on the upside. I think some of that money will come into our stocks. When the banks deleverage by paying off some of their debt, that really means the debtholder and the bank has gotten a lot of cash, and now they have to do something with the cash to invest it, so there are really billions of dollars of money out there. A lot of it in money-market funds for individual investors, and that will come back into the market, and some of it will come into stocks and others into bonds, so we are expecting '09 probably would be the big turnaround in the stock market.

Our monthly distributions to shareholders still $0.14 per month, for the months of November and December it has been declared, we will declare a dividend again in January. We hope to continue at the $1.68 per share per year. We are working with some changes, and I hope this will let us build our earnings and our pay-outs even more as time goes on.

At this point in time the distribution rate which is $1.68 per year, with the stock price trading at $6.99 as it closed yesterday, that is a 24% yield on the distribution, and it is now very, very high. We really don't understand why the stock has fallen so much, other than many of the other BDCs have had to cut their dividend. We are still committed to continuing our dividend.

We have a great portfolio and we just continue to pay out our distributions, and before I forget, we have a Shareholders Meeting, and it is going to come up and we are in need of all of our shareholders. We need to pass one of these items in the proxy. We are asking shareholders in this Company as we did in our other companies, to give us permission to sell stock below net asset value, if the opportunity arises. We need this flexibility and hope you will vote for that item.

We filed a preliminary proxy. It hasn't been mailed out yet. We hope it will be cleared soon for mail out. You will get it in the mail and if you could please vote by sending in your proxy, or you can look in the proxy and get the proxy number off of it, and vote by telephone. Please vote your proxy. It costs us a fortune to gather the votes each year, so helping us cut down on that cost, and really those costs just come out of money that we can pay for dividends.

The net asset value has gone down because of depreciation. I was just looking back. The net asset value was $13.41 at the end of '05, and now we are at $12.89. We certainly can't sell any new shares at $6.99, but if it came back up close to $12, we might look to raise a little bit of equity, in order to continue to take advantage of all the rich opportunities that are out there for us today, and put that money to work at very significant rates.

Please go to our website again. Please get your notifications directly from us. We don't send out any junk mail. Just news about the Company, and go to www.Gladstonecapital.com, and sign up for that distribution.

Folks, as far as we can see, things look okay for our Company. We think the economy is reaching a bottom, and we will start to gather some strength but we can only see a couple of quarters out, and we want to be careful, we are stewards of your money. We will stay the course and continue to be conservative in our investment approach, and not go too fast.

I will now open it up for questions. If we have some questions, please, Operator, come on and lead the questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question is coming from Troy Ward with Stifel Nicolaus. Please state your question.

Thank you and good morning David.

Good morning Troy.

Just real quick, can you talk about within your credit facility, kind of the covenants that are out there? I know the minimum net worth I believe is $100 million plus 75% of all of the equity that has been raised. Could you give us what that number is, and also the borrowing base? Do you have a borrowing base covenant, and where you are at on that?

Yes, the borrowing base covenant we are covered very well on. As you know we haven't drawn down much of our line of credit. We are not too far away from our net worth covenant. We don't see busting that. We certainly didn't break it for September. We will be within 20 million or so of that, so we are watching that one closely, to make sure we don't break that covenant. Don't think we will, but if we do we will have to negotiate with our lenders to make a change there.

And on your facility, I think I don't know if I heard you right, if it weren't to be renewed if you would choose not to renew it at some point in the future, did you say it has a one year or two year wind down?

It is a two year tail on it.

Okay, I thought that was a one. I will have to check.

No, wait a minute. Maybe it is a one. Gresford, is it just one? I am sorry. I was thinking of the other loan. It is a one year tail.

Okay, great. That is what I was thinking and can you talk just a minute about you touched on your dividend policy, and I know that is a backbone to your firm. Can you talk about how you view that longer term, if NOI doesn't come up and reach that dividend and versus the capital, and then secondarily, how you look at the ability to pay dividends, versus maybe share buybacks?

Yes, I wish we could do share buybacks. This would be an excellent opportunity to do so. Unfortunately, we don't want to do that, because we think it would not be good for our lender. Our lenders don't want us to use debt money to buyback equity. We would love to find someone that would lend us money to buyback, and share in that profit in some way, because it is a great opportunity.

For us in terms of the dividend, we are running at about $0.42 a quarter. As you know this quarter was probably our lowest quarter at $0.29, so that is about a $0.13 difference, and that roughly works out to about $2.7 million per quarter, that we have to borrow and pay out. I am hoping that is the lowest number that we are at any time soon and if it is, we will be fine. We have a $300 million line of credit and it's in good shape, but we are working hard to get the deals that are on LIBOR with no floors. Some of that sold and put into new loans.

As you know, the math there, I think I have explained it before, we are running about $0.89, so if you sold our loans and round it off to $0.90 to make it easy, if you sold a $1 million loan and got 900,000 in, you have thrown away the million dollars that is earning round numbers, maybe 4%, 5% range today, so you are making $50,000 in best case, and then you put the $900,000 to work at minimum 10% today, so you are making 90,000, so there is a real step-up every time we move dollars from one place to another, it is just that we hate to take the hit on the sale of the loan, so we will just have to see how we work that out.

We also have the three loans that are not paying today, and I think at least two of those will be fixed over the next year and come back in as dividend, as interest payers so that will help the dividend, but right now we are still committed to the $0.42 a quarter, $0.14 every month, and so as a result, there is no worry about being able to meet that pay out.

And then one final one and I will hop back in the queue. Just the BDC model as a whole, I mean we have seen in this very turbulent time, that maybe some weaknesses of the model have been exposed, with the inability to issue preferred and the mark-to-market in such a difficult market.

Can you talk whether or not you think you are going to get relief from any of those? I know they are in Washington, and there has been a lot of talking about potential relief to mark-to-market or the preferred. What is your assessment of those?

Well you can issue preferred. There is no problem with issuing preferred. It just counts as debt.

Right, which doesn't really help.

Well it would certainly be long term versus short-term, so it would help in that perspective. We wish we could find somebody that would like some preferred stock in our companies, because we would gladly trade off some long term preferred for short-term debt that we have on our portfolio in our Company, so we don't know what the SEC will do. My guess is that they will not give relief but that is just a guess. We probably couldn't raise preferred stock at any decent rate today anyway, so I am not sure if that is a solution for the current problem. Every time I turnaround, somebody tells me that the BDC model is broken, and doesn't work, and all of this kind of stuff.

I think it goes back to I will use my analogy, and that is when you are driving, when I am driving and the speed limit is 45 miles an hour, I see people whizzing by me at 55 to 60 miles an hour. When you do that, and you violate the law, you can pay consequences. You will have problems. You have a high probability of something going wrong that you didn't expect to go wrong, either an accident, or a policeman pulling you over and giving you a ticket.

There are the same things, there are the laws of lending and investing, and when you go outside those, and violate those laws, you run the risk of something bad happening, and you run a higher probability of default, or a higher probability of loss, and I don't think the BDC model is busted. I think some people took some risks they shouldn't have taken, and are now paying the consequence for it.

We always see this in a heated marketplace and many of the analysts that followed our stock criticized us pretty bitterly for not being aggressive and not reaching for deals, and we wouldn't do that and as a result, we are still in relatively good shape compared to our peers, and I think our portfolio will continue to stand up in '09, so I don't think the BDC model is broken. I think some people violated the cherished laws of lending and investing, and are paying the consequence for it.

Great. Good commentary. Thanks, David.

Next question, please?

Our next question is coming from Kenneth James with Robert W. Baird. Please state your question.

Hi, good morning.

Good morning.

In your request in your proxy to be able to offer stock below net asset value, did you put any kind of or looking at putting any kind of restrictions on that, as such can't be a certain percentage of the outstanding shares, or it can't be raised more than X percentage below NAV? Are you putting any language in there like that?

No, we didn't. We are hoping that you folks will trust us. As the largest shareholder of Gladstone Capital, I am not in a position to want to dilute myself down dramatically, so we are asking to trust us to use our best judgment on that.

Okay, and then do you keep any kind of aggregate portfolio or statistics on EBITDA revenue kind of for the companies, and have you seen a dramatic kind of drop-off since September 30, you talked about the portfolio performing pretty well, but it seems like things have changed pretty materially just in the last 45 days or so. I wonder if you could comment on just the most recent kind of near term timeframe?

Yes, we haven't closed the books on November, yet but for closing the books in October we haven't seen a great deal of change.

Now some of the businesses we have some that are much more positive. They are continuing to grow, and we have others who have seen some of their backlog fall off, and we have gone out to all of our businesses and told them to hunker down and stay strong. We have been telling them that for some time. Sometimes they listen to us, and sometimes they don't. When volatility comes into the marketplace as it is today, you need to be just very careful, and I think most of the portfolio companies that we work with understand that, and have been doing that, so I don't expect any dramatic change in the portfolio.

Okay, thank you.

Other questions, please?

Our next question is coming from Vernon Plack with BB&T, please state your question.

Great. Thank you very much. David, I wanted to talk just a little bit more about the minimum net worth requirement on your credit facility. I am calculating it looks like it's about 248 million right now, 248 million to 250 million, and with your net asset value around 272 right now, it appears you are about 24 million away from that, and just like some comments, particularly given the fact that the broader markets have really taken a hit since September 30, B rated paper broadly speaking is down 20 to 25%, and BB paper is down 20%, and it is hard for me to see despite the issues with fair value accounting, if you had to mark your portfolio today to fair value, how you would not be in violation of that minimum net worth covenant.

Well we have done the calculations as well, Vernon, and we just don't know at this point in time what certainly December 31st is going to be. We don't have to make that calculation on a monthly basis, so we are all looking at that, and we will certainly sit down with our lenders if we look like we're going to break that covenant, and negotiate some kind of agreement around that. But at this point we feel okay about it. We have been marking, I think the marketplace is a lot different.

Some people have not been marking down their markets the way we have, and my guess is that we will come down by something, if it is more than 24 million as you mentioned, then obviously we will have a discussion with our lenders if that is the necessary thing, and you know the difference with us and some of the other lenders, is that we do have plenty of cash flow to pay the interest on our debt. Some of the others are getting close to 1:1 coverage, or even not covering the ability to pay their interest on their debt.

I think we are in a different position than those folks, but we will just have to wait and see. We have had no discussions with our lenders about possibly flunking that test. That is the only one that we are close to.

Okay, and I think you mentioned, and I may not have caught all of this, David, but I think you briefly mentioned near the end of your comments that you were working on some changes, as it relates to perhaps the distribution and/or the payment?

No, the only thing that I mentioned there is that if you know as you remember, we give back all of the incentive fees. We haven't earned that much incentive fees, and we were trying to figure out a way long term to solve that problem as well, so that was the thing that we talked about.

Okay, thank you.

Other questions, please?

(OPERATOR INSTRUCTIONS). Our next question is coming from Henry Coffey with Sterne, Agee & Leach. Please state your question.

Good morning, David. Henry Coffey, how are you?

I am fine, Henry.

In listening to you talk, a lot of the issues I had in my mind have been addressed already, but in listening to you talk, there isn't the TARP, but there is the SBA, and I am wondering as you look at your sort of overall set of portfolio companies, if that is an opportunity you would be willing to revisit, given the kind of diversification and the loan sizes, and everything else you are doing and your experience in this area, it seems like it might be a great market for you to start looking at. It is permanent debt. Obviously you couldn't fund existing assets with it, but it is a potential. I am wondering what your thoughts are in that area?

We already own an SSBIC that helped disadvantaged small businesses. We are also applying to the SBA for a regular SBIC. It would avail us to, what is the maximum we can get Chip?

High 120s I think at this point.

120 some, we understand they are going to raise that, so we will most likely, we don't know for sure, we put our application in, and we are going through the process. We assume that we are good debt by SBA to borrow that money, and if so, we would have that money available to grow the asset base, as well as the income base, and there are a lot of rules and regulations with that, but as you know, we, I think between the group here, we have all operated five SBICs at different times in our careers, so we are pretty familiar with that, and we are going down that path, and hopefully we will have news for everybody in the next quarter.

And would that be inside GLAD or would that be --?

It is inside of Gladstone Capital.

Right, and then what about any thoughts on ever combining some of the existing funds that are also out there, to sort of build up asset size, and maybe simplify the funding equation?

Well we have got different lenders and different investors in those, and so we haven't gone down that path yet. People keep calling us up and wanting to know if we're going to buy any of the other BDCs, and the answer has always been no to that. We are not a consolidator of the BDC industry, but anyway that is always a thought.

We have looked at some other alternatives for raising equity, but they are all very expensive at this point in time, and very difficult to get done as well, so it may be better for us just to continue our pay out, work our portfolio, build our net investment income back up to the $0.42 a share, and go from there. This isn't a time, I don't know how you feel about it, but we normally don't like to increase our assets very much during a deep recession like we are in now.

We like to know that we found bottom, and we probably won't know that until two or three months, even a quarter several quarters after it has happened, where the bottom has actually hit, so we may, if this is the bottom today, this quarter we probably won't know that until the second quarter of next year, but the next two to three years after a period of time when you found that bottom, is usually the greatest period for us, and so we are not sitting on the sidelines. We are closing one or two, three deals every quarter now, so we are perking along at a slow pace, very careful, and that is probably the best way of operating in this current recessionary period.

Well, David, it is just good to hear your voice and it seems you are more optimistic than I have seen you be in a long time.

We are just waiting for the final turn, and as soon as it goes, we will put on the jets and take off. Who is next on the call?

Our next question is from Leroy Carter, a Private Investor.

Good morning David. When you say LIBOR, are you using a 30-day, 60, 90? What are you using?

We are using the 30 day LIBOR.

Okay. The three loans that are bad, haven't a couple of them been under the 9 million rate a year or so ago? Or are these new?

No, no, they are all old.

They are all old?

Yes.

In your opinion, how much of that 13 million do you expect to recover over a couple years?

I think we will get it all, Lee.

Do you? Okay. Very good. What would the difference be in your book value if instead of marking to the market every day, you could use a permanent investment type of thing. I am not saying that right, but I think you understand what I am asking

Well what do you mean by permanent investment?

Well, in other words, they make you market the loans or the debt that you have marked to the market every day today. Now what they are trying to get changed or some people are trying to get changed, if you keep the loan until maturity, you would be marking it at a much different figure.

Well that is exactly our point.

I was wondering what difference would that make in your book value?

Oh, Lee, it would make a huge difference in book value. The book value would go up pretty dramatically.

Okay.

I don't know what that number would be, because we don't run it. We try not to, the SEC requires us to give you one number in terms of our valuation, and not equivocate and say, well, it should be this or it should be that. So as a result we don't go out and calculate other numbers, but I can tell you that if people let us mark to maturity kind of value, it would be a whole different world.

Different world, yes, okay. One other question. On current leverage, Chip mentioned it, but what is it about 1.4?

No, you mean leverage, how much money have we borrowed?

Yes. In other words, $1 equity to how much debt?

We have got about $150 million outstanding on the line of credit, and about 272 million of net worth.

Okay.

So obviously less than the 1:1 requirement.

1:1, okay. All right, thank you. Doing a great job in this market, I will tell you. Thank you very much gentlemen.

Who is next?

Our next question is coming from Troy Ward with Stifel Nicolaus.

Hi, David just a quick follow-up. You said something interesting there, about if you are interested consolidating the industry, and it seems you sound like you pretty much dismissed that out of hand. First of all, what are the hurdles, and why do you dismiss it out of hand? What would the hurdles be to do some consolidation in the BDC space, and do you think any of that will actually happen?

The smaller BDCs may seek some refuge in larger BDCs, but at this point in time, the larger BDCs don't seem to be in a position to do any consolidating, so I would say that most of us including us don't have the currency to do that kind of consolidation, unless you are are going to take on one of the turnaround BDCs that have problems and their stock is trading at a very low rate, much lower than ours. We are not in the business of buying turnaround, we are not turnaround artists per se.

We do a good job in our own portfolio when there is a problem, but taking on somebody else's problems, and trying to fix them is just not what we do. We are not a distressed debt player I guess is a better way of saying it, and so for us, it is a matter of personal preference. Some of the deals would have to be done in a hostile take over kind of thing, and while there have been some hostiles in the business, and [EVC] was a good example of that, we are just not interested in hostile takeovers. It is not in our chemistry here as a group. We are not hostile takeover people.

There is also the problem of one BDC can't own more than 3% of another BDC unless you are going to own all of it, so you would have to have all shareholders vote in favor of it in order to make it happen. Now there are some ways around that, but it takes a lot of cooperation from all of the owners and management of the BDCs. I think most of the BDCs today are while they are going through some agony, are quite content to be masters of the own universe, and run their own businesses, and really don't want to combine with anybody else, even the smaller ones have a desire to remain independent, run their own show, rather than being a part of a bigger organization.

So for us it is the human part of it. That is we don't want to do it. There is the human part of it is probably most of the BDCs don't want to do it, and then there are the regulatory hurdles of getting there. I think all of that makes it very difficult for somebody to roll up or combine the BDC industry.

Now if we have a Hank Paulson who comes in, and says you are going to merge with so and so, I think that would be a whole different world, but there isn't that kind of regulator of the BDC space.

Great, thanks.

We have no further questions at this time. I would like to turn the floor back over to management for closing comments.

All right, well we thank you all very much. And we do want to mention that today is the birthday of our Chief Operating Officer, Terry Brubaker, so we are wishing him 'Happy Birthday' today.

And with that, we will call it quits, and thank you all for calling in. That is the end of this conference.

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