Gladstone Capital Corp (GLAD) 2009 Q1 法說會逐字稿

Greetings and welcome to the Gladstone Capital third-quarter 2009 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.

And thank you, Claudia, for that nice introduction; and hello and good morning to all of you out there. This is David Gladstone, Chairman, and this is our quarterly conference call to shareholders and analysts of Gladstone Capital, NASDAQ trading symbol GLAD, G-L-A-D.

Again, thank you all for calling in. We are always happy to talk to shareholders about our Company, and I really wish there were more often periods that we could get together on the phone. I hope you will all sign up for 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, you have an open invitation to come by and visit us here in McLean, Virginia, a suburb of Washington DC. Just please stop by, say hello. You will see some great people, some of the finest people in the business working for you here.

Now I need to read a statement about forward-looking statements. 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 future performance of the Company. These forward-looking statements inherently involve certain risk and uncertainties, even though they are based on our current plans. We believe those plans to be reasonable.

There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied in these forward-looking statements, including those factors listed under Risk Factors that are in our 10-K and 10-Q filings and our prospectuses filed with the Securities and Exchange Commission. Those can be found on our website at Gladstone Capital, www.GladstoneCapital.com, and 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.

For those of you who have been on many of these calls before, we have changed the format and go at it in a new way of reporting to you so that you can hear from some of the team that is working for you here at this Company, other than just me talking all the time. I have no plans to leave, but you should know that there are a lot of talented team members here at the Company, and we think shareholders should hear from some of them.

We will start with our President of the fund, Chip Stelljes. Chip is the Chief Investment Officer of all the Gladstone companies, and he will cover a lot of ground for us. Chip?

Thanks, David. As most of you know, we continue to operate in a historically difficult environment from an economic, financial sector, and investment perspective. Through the first fiscal quarter ended 12/31/2008, the environment actually worsened for making new investments. While the longer-term prospects and our deal flow remain strong, the continued instability of the financial and lending markets, combined with the significant downturn in the economy and the lack of any real visibility into the rest of 2009, has left many investors as well as ourselves on the sidelines.

We did not close any new investments during the quarter. The new investment production of $8.7 million went entirely into existing portfolio companies in the form of additional investments or draws on the revolver facilities.

During the quarter, we received repayments of approximately $17.1 million due to loan payoffs, investment sales, normal amortization on loans, and paydowns of revolvers, resulting in a net production decrease of $8.4 million for the quarter. Since the end of the quarter, we made about $4.2 million in additional investments in existing portfolio companies.

The pipeline continues to be strong. We see a noticeable change, obviously, in the opportunities coming to us. Banks and buyout funds are calling us aggressively because so many lenders are no longer investing. And pricing and structure continue to improve.

Unfortunately, finding new investments with strong 2008 performance and a positive outlook for 2009 are few and far between. If we can find them we could make some strong loans during this time, provided we have the capital to do so.

The net decrease in the investments this December quarter of $8.4 million allows us to deleverage or to reinvest the funds into higher-yielding opportunities. We continue to look at ways to increase the yield on the existing funds by refinancing lower yielding senior loans with third-party lenders while trying to maintain the higher-yielding junior debt on our balance sheet.

Our deal flow of investments again is large; but we really need to be confident that we understand the economic cycle ahead of us and that we have the capital to pursue the pipeline of opportunities.

At the end of the December quarter, our investment portfolio was valued at approximately $385 million versus a cost basis of $451 million. So our portfolio was fair valued at approximately 85% of cost. Depreciation for the quarter was therefore about 3%.

We continue to remain confident that the valuation is more reflective of the broader market for loans rather than any substantial change in the quality of our portfolio. Clearly, there were some loans being dumped by banks and hedge funds at the end of the year at fire sale pricing, rather than pricing derived from an orderly market. The use of fair value comes in to suspect when there are forced sellers and limited buyers or, in some cases, no sellers and no buyers.

Even though values are slightly lower this quarter, we expect most of the portfolio to continue paying as agreed through the near term. We are watching our portfolio companies' revenues and backlogs very carefully to judge where we think the underlying companies are headed for the year.

At the end of the quarter, we had three loans on non-accrual and two additional loans that were not performing well, with a combined total cost basis of about $12.6 million. We are in control of two of the companies with loans on non-accrual and we are working aggressively to fix the problems and improve their profitability.

Two of these situations require us to insert new management, because the issues at the companies were more company-specific and not necessarily due to the tough economy. We now have new management teams in place to help us on those two, and we are beginning to see some results there.

On a dollar basis, the five nonperforming loans have a cost basis, again, of $12.6 million or less than 3% of the cost basis of all loans in our portfolio. In our opinion, it's a good statistic for the difficult time that we are in.

To date, almost all of our exited investments have had a positive internal rate of return. We may have some losses in the future, but we really are working very hard to keep them to a minimum.

We continue to have a high concentration in variable rate loans so that we participate when rates increase. While our rates are very variable they often have a minimum rate or floor, so that declining interest rates are mitigated. About 70% of our loans have these floors.

Unfortunately, 30% of our loans do not have floors. And with floating rates having fallen, we have been generating less income.

At December 31, 2008, we had two fixed rate loans with a cost basis of $14 million or approximately 3% of the cost basis of our total portfolio of loans and investments.

Another measure of the quality of the assets is reflected in the fact that our average loan rating for the quarter that just ended remains relatively unchanged. Our risk rating system gives the probability of default rating for the portfolio with a scale of zero to 10, with zero representing a high probability of default and 10 a low probability. Our risk rating system for our non-syndicated loans showed an average of 7.3 for this quarter, which was the same for the same prior-year quarter.

The average risk rating for unrated syndicated loans was 6.5 this quarter versus an average of 6.3 for the prior-year quarter. As for our rated syndicated loans, they had an average rating of CCC+ or Caa1 for this quarter and the prior-year quarter.

Overall, the risk profile has remained constant according to our risk rating model. We think this is a good sign and are satisfied with our current portfolio mix.

In addition to the solid quality of the assets, the quality of income remains good. As we 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, but is not received until much later and sometimes not at all. This income is subject to our 90% payout requirement, so the company does not receive the cash but has to pay off the income. So we avoid these structures for this reason.

Since inception, we've made loans to approximately 132 companies. We have been repaid or exited form 71. The average return of the exits have been about 13% for syndicated loans and 16% for non-syndicated loans. We have a seven-year track record and we hope to continue it this year, which is a difficult one, obviously.

Since last quarter, the senior and second lien debt marketplace for larger middle market companies has continued to have tremendous liquidity problems. For the most part the market was closed; that is, there were very few buyers. We have about $72 million at our cost basis in senior and second lien syndicated loans. This is where we have most of our variable rate loans without floors. And these loans have seen their value decline more than the others.

The market pricing for the larger middle market loans continues to change. For senior syndicated loans of $200 million or more, last year's rates were about 2.5% over LIBOR. LIBOR, of course, is the London Inter Bank Offering Rate, which is recognized as the leading indicator of short-term corporate rates.

Now they seem to be closer to 6% or more. Because these loans are at higher spreads, this causes older loans to command a lower market price. However, if we continue to hold these loans until they mature, we should get 100% of our capital back with no loss. If we had to sell them today at the fire sale prices, we would have a loss. All but one of these syndicated loans is paying as agreed.

In addition to widening spreads over LIBOR, the norm for LIBOR has traditionally been about 5% or 6%, and was approximately 0.5% at December 31, 2008, and is about 0.3% today. A drop in LIBOR obviously lowers our income on our floating rate loans without floors.

The small loan market in which we invest most of our capital has not seen much competition or activity from banks. Many banks have tightened up their credit standards. We normally compete with other BDCs, private lenders like the mezzanine loan funds, a few hedge funds, and some of the small business investment companies out there.

Again, our loan request pipeline is strong, and if we can access capital and get comfortable with the risk and the economic cycle, it may materialize into more new investments for us as the year proceeds. We will just have to wait and see.

Our goal again is to be a strong, profitable company, not necessarily the biggest company. With that, I will turn the presentation back to David.

Thanks, Chip. That was a good report. Now let's take a look at the financials. For that we will hear from Gresford Gray, our Chief Financial Officer. Gresford, go ahead.

All right. Thanks, David. We will begin with the balance sheet. Our balance sheet continues to remain strong. At the end of the December quarter we had approximately $403 million in assets consisting of $385 million in investments at fair value and $18 million in cash and other assets.

We had about $146 million borrowed on the line of credit and about $254 million in net assets. So we are less than 1-to-1 leverage. This is a very conservative balance sheet for a company like ours, and we believe that our over our risk profile is low.

For the December quarter, net investment income -- which is before appreciation, depreciation, gains or losses -- was about $5.9 million versus $7.3 million for the same quarter last year, a decrease of about 20%. The decrease in net investment income was primarily due to the lower transaction fees credited against our base management fees and the amortization of deferred financing fees incurred in connection with some amendments we make to our credit facility.

Note that we have also seen LIBOR fall; and for our syndicated loans that has hurt our earnings as well. As rates go back up, we expect that our income will also increase, all other things being equal.

On a per-share basis, net investment income for the quarter was $0.28 per share as compared to $0.43 for the same quarter last year. This was a per-share decrease of about 35% due 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 last year. Some of this decline should be removed as the money from our last public offering is put to work.

As all of you know, net investment income is the most important number to us because it is the number that is closest to our taxable income; and that taxable income is the income where you prepare a dividend.

Now let's turn to unrealized and realized gains and losses. This is a mixture of appreciation, depreciation, gains and losses. We ought to talk about two categories in this section. First, gains and losses because they are cash items; and second, we talk about appreciation and depreciation, which are non-cash items.

For the quarter ended December, we had net realized loss of about $1.7 million primarily from the sale of a syndicated loan and net unrealized depreciation of approximately $13.3 million, which is non-cash and comes from the value placed on our portfolio.

Although our aggregate investment portfolio has depreciated, our entire portfolio is fair valued at 85% of cost as of December 31, 2008.

The unrealized depreciation of our investment does not have an impact on our current ability to pay distributions to stockholders.

As explained in our 10-K filed yesterday, we made a change in our valuation procedure to value our syndicated loans using a discounted cash flow method versus relying on third-party indicative bids. Given the continued economic downturn, during the quarter ended December 31 the market for syndicated loans became increasingly illiquid, with limited or no transactions for those securities which we hold. Recent accounting guidance was issued in September of '08 -- specifically FSP 157-3 -- which provides guidance on determining the fair value of an asset when the market for that asset is not active. The guidance noted that in the current economic arena there may be indications of an illiquid market that may include three factors.

The first is a significant decline in the volume and level of trading activity in that asset. The second, pricing quotes that vary significantly over time or amongst market participants. Or the third factor, prices that are not current.

The marketplace from which we historically obtained indicative bids for purposes of determining fair value for our syndicated loan investments showed these attributes of illiquidity.

Historically, our valuation procedures specified the use of the third-party indicative bid quotes for valuing the syndicated loans, where there is a liquid public market for those loans and market prices quotes are readily available. When there was an active market, the use of these agent desk nonbinding indicative bid quotes was deemed to be appropriate and acceptable in accordance with FAS 157.

However, due to the market illiquidity and the lack of transactions during the quarter ended December 31, we determined that the current nonbinding indicative bids for our syndicated loans were not based on transactions within an active or liquid market and could not be relied upon. An alternative procedure would need to be performed until liquidity returns to the marketplace. As such, we have valued our syndicated loans using a discounted cash flow method for the quarter ended December 31, 2008.

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. Please note that we are talking about weighted average, fully diluted common shares when we use per-share numbers. This is the most conservative way of stating earnings per share.

For the December quarter, we had a net decrease in net assets resulting from operations of about $9.1 million versus a net increase of about $1.9 million last year this time. This December quarter, we're at negative$0.43 per share versus last year at positive $0.11 per share.

The change is primarily due to a greater amount of net unrealized depreciation from our non-control and affiliate investments and the dilution of the common shares from the shelf offering last year.

While we believe the overall investment portfolio is stable and continues to meet expectations, with the continued uncertainty in the current economy and credit market, investors should expect continued volatility in the aggregate value of the portfolio. And now, I will turn the program back over to David.

Thank you (technical difficulty).

Ladies and gentlemen, thank you for your patience. Your teleconference will resume momentarily.

Well, thank you, Gresford. That was a very good presentation. We had a glitch in the phone and I am sorry about that. I hope each of you that are listening in will read our press releases and also obtain a copy of our quarterly report called the 10-Q which has been filed with the SEC and can be accessed on our website at www.GladstoneCapital.com and also on the SEC website.

As Gresford discussed, we had to change our valuation technique because the market for senior syndicated loans was judged to be inactive, and the inactive bids that we were getting from the loan arrangers were not based on actual buying and selling of syndicated loans. They seemed to us to be more like well, guesses rather than bids.

The volume of sales and new issues had almost come to a stop except for a few fire sale transactions; and many of the loans that we had purchased and participations are in small loans that have four to eight lenders in the securities. So they just don't trade at all, and there are no one bidder for these smaller loans.

Let me say again the indicative bids we did get for our syndicated loans were based on prices that came from a market that we describe as simply very limited volume and in some cases totally inactive. Some of the sales that did occur in the larger loans can only be described as a fire sale and really not an orderly sale. An orderly sale is what is prescribed by the accounting guidelines and by the publications of the SEC with regard to fair value.

With the enactment of FSP 157-3 which Gresford talked about by the accounting profession, we now have the ability to look at value of the loans using other methodologies. One of those methodologies that we selected are discounted cash flows. That gives us -- lets us come to an orderly sale value, we believe.

This relief on the fair value is the first step in what I hope will be a full review of using things like the value of the numbers that come out of inactive markets based on determining fair value. We need some relief in this area.

On another subject, our biggest worry today is the debt marketplace for our funds, as well as for our portfolio companies. We are worried about the banks' ability to provide our line of credit and for banks to provide lines of credit to our portfolio companies. We are just hoping that as conditions improve, by the time we have to renew the line again in May that things will be different.

We have talked to our lenders. They are working on extending our line of credit. We do believe they will renew the line of credit. Obviously, they will charge a higher rate and probably be more restrictive; and that would be right in line with everyone else that is out there today getting their lines of credit renewed. We will just have to wait and see what will happen over the next three months as we work with our lending institutions and get our line of credit in place.

We also worry a lot about the credit marketplace and how they impact our portfolio companies. There are a fair number of regional banks now that are making new loans based on the assets of the business. These are what we call asset-based lenders. These asset-based lenders are much more plentiful than they were last quarter. I think this is hope that the credit markets are freeing up for the short-term asset-based loans.

This is the first good sign that I've seen, and it is usually the first sign of a change in the loan marketplace. So we are beginning to pick up a little optimism there.

We worry that oil prices will go back up. That is of great benefit today, the lower oil prices. But it is a worry that they will go back up.

Not currently worried about inflation, but it is our next worry. I fear that it will be our primary concern come 2010. The amount of money being spent on the war in Iraq and Afghanistan is certainly hurting the economy. But just want you all to know that the team here at your Company supports our troops in Iraq and Afghanistan. They are the true heroes in this period of history. They risk their lives for us, and we hope they all come home safe.

Even worse than the war spending is the porkbarrel spending by federal, state, and local governments. I believe they are just out of control. I hope the new administration can cut some of the porkbarrel spending. But looking at the so-called stimulus package that is being proposed now, they're filling that spending package with goodies for many of the supporters of the new administration and congressional delegation.

The stimulus spending is dislocating a lot of markets. I am not sure how this will turn out. It looks like we are partly nationalizing a lot of the banks and insurance companies and auto businesses. And if we are going to go back to capitalism over time, these partially nationalized businesses are going to have to raise a lot of equity to take out the government preferred stock.

All this spending from these stimulus packages and these TARP programs will mean more taxes for our citizens, and I just don't know how much more taxes people can tolerate.

It will cause much more dislocation in the economy. And there are many in Congress that call for increased taxes on the so-called rich, and the definition of rich continues to go further and further down and include more and more of the middle class. To me, this is clearly socialism in the making.

The trade deficit in China continues to be just terrible. China continues to subsidize their industries to the disadvantage of our businesses. They subsidize their oil prices substantially. Gas prices are lower there due to the government subsidy.

On the other hand, we tax our gas prices here and make them higher. So we have a tremendous disadvantage just on oil and gas alone.

The downturn in housing industry is related to the disaster in home mortgage defaults. All of this is going to continue to hurt our economy. No one knows how many home mortgages are going to fail, but we had originally thought it might be upwards of $400 billion. There now seems to be some estimates that put the number much higher.

This is the main cause of the recession today. The housing problem will likely turn around this year because housing prices have fallen so much they have come back into line. They have made a lot more people qualified buyers. And if the stimulus package cuts mortgage rates as they talk about to 4%, then housing sales will turn positive.

Already, many of the mortgage brokers are seeing a steady stream of requests for refinancing. So there is movement going on in the housing business.

In spite of all these negatives that we talk about, the industrial base of the US is certainly not in a depression. The thing that is hurting the economy is the lack of banks lending money to companies for long-term needs. The short-term needs, as I discussed, for these loans are asset-based lenders. They are available. However, most of the banks have just about stopped making long-term loans.

This is just like it happened in 1989, '90, '91, except in this case the federal government is buying stock in banks, rather than taking them over and liquidating them. I wish the government would buy some preferred stock in our fund. We would lend it out to our small businesses.

We tried to apply for the TARP money in the bailout bill, and we were told it is just for banks, insurance companies, and auto manufacturers.

We are guessing that the downturn that began to start in 2008 will continue at least the first half of 2009. We think this market is stabilizing now. We will begin to see a turn-up, I think, in the next two quarters.

If that is true, it will be a really great time for us, if this is the turnaround.

Also, please know there is a very large amount of money sitting on the sidelines. When that comes back into the marketplace, it will explode on the upside. I think some of that money will come to our stocks.

And when banks delever -- thinks about this. When banks delever, they are paying us off some of their debts. That means the debtholder has received cash and now has cash to invest. There are billions of dollars not only on the sidelines there but in money market funds that will be freed up for investment in stocks and bonds.

As far as our distributions to shareholders, we held it at $0.14 a share, even though we certainly didn't earn that. Probably won't earn it for January, February, and March. If you annualize that payout, it is $1.68 per share.

We are working on some changes here internally that I hope will help us build our earnings and earn our payout. At this point, we have to pay some return of capital in order to maintain the payout. If rates go back up, we certainly will be able to cover the payout with ordinary income.

At this distribution rate, that is the $0.14 a month per share, and with the stock price at $9.95 as it closed yesterday, the yield on the distribution is now very, very high. We quite frankly can't understand why it has fallen so much.

But we expect our portfolio to remain solid and allow us to keep paying our distributions. And the stock is trading today at about an 18% discount to NAV. It is a real bargain, in my estimation.

Oh, and before I forget, we have a shareholders meeting coming up in about two weeks on February 19. You are all invited, obviously. We need help of all our shareholders in passing one of the items in the proxy. We are asking shareholders, as we did in Gladstone Investment, our other company, to give us permission to sell stock below net asset value if the opportunity arises; that is, if we need it.

We need this flexibility and hope that you will vote on this item in favor of it. The ISS, the people who monitor this, came out in favor of it. We filed and mailed a proxy to you, so you should all have your proxy statement.

And you can vote your proxy in four ways. First of all, you can take the proxy and sign it up and send it in. You can vote by contacting Georgeson, that is our proxy solicitor, at their telephone number. It is 800-932-9864. Please have your proxy card handy because you need that proxy number in order to vote over the telephone. Again, the phone number is 800-932-9864.

You also can use the same proxy number and go to the Internet and go online there at www.proxyvote.com, proxyvote.com, and vote your proxy number that way.

And you can also call your stockbroker and your broker can help you get the vote in. But we do need your vote. Please vote your proxy. It costs us a fortune to gather these votes each year, so help us cut down on the cost by voting early so you don't have to call you and beg you to vote, as Georgeson. I am sorry some of you have gotten phone calls probably at the dinner table at night asking you to vote.

Now please go to our website; sign up for some e-mail notifications. We don't send out junk mail, just news about the Company.

And again, as far as we can see, conditions look okay, if not great. We think the economy is reaching a bottom. We will start to gain some strength soon, we think. But we can only see a couple of quarters out, so we want to be careful.

That is why we are not putting a lot of money to work until we can see the turn in the economy. We are stewards of your money and we will stay the course and continue to be conservative in our investment approach.

With that Claudia, if you will come back on, let's open up the lines for analysts and shareholders who want to ask some questions.

(Operator Instructions) Greg Mason, Stifel Nicolaus.

Good morning, David. If you could talk a little bit about the gap between your NOI and dividend, and how you're funding that today.

And what do you think about the new IRS guidelines that could allow the dividend to be paid in stock, using stock to cover that gap?

Thank you, Greg, for asking that. We are studying that proposal by the IRS and we will look at that. Our Board has asked us to put together a memo, and some folks here in the office are putting together that memo so that we can provide it to the Board.

Perhaps we will use it. I just don't know. It is too early to say on that part.

The main reason we have gone down in our ability to pay the dividend has been the fact, first of all, that we've had some variable rate loans. As you know, the variable rates that are tied to LIBOR are really very low today because LIBOR is so low. We did not have floors on some percentage of our loans.

Another reason is that because we have been so weary and wary of the economy, we have just held back on putting new deals on the books. Each time we put a deal on the books we normally get a 1% or 2% fee; and that fee goes to pay down the fee that we charge the Company. So the Company has not been getting that benefit because there has been no fees charged because we haven't closed loans.

If go back to closing loans and charging 1% to 2%, as most people are doing today, that money would roll in as well and help pump up the earnings.

But at this point, obviously can't go forever and continue to borrow the money that we payout as a dividend. So we don't want to do that for a long period, but we don't mind doing it for short stretches if we think things are going to turn around.

So those are the things that we are looking at today. Do you have another question, Greg?

Yes, one more and then I will hop back in the queue. On those last lines, if we look at what Deutsche Bank did with the gain line and kind of limited it down to what you had borrowed when it came up for renewal, do you foresee potentially the same thing happening?

And if that occurs, how is that going to impact your ability to borrow to fund the gap, dividend shortfall, and make new investments?

Yes, the new investments are being driven right now by the fact that we are so upset about the economy and not being able to figure out which companies will do well and which won't. So have we concentrated on making sure that our portfolio remains strong. So that has been the main driver of why we have not put money on the books.

We do have a very large line of credit. I would expect the line of credit to come down by some amount. I don't think it will be as much in this Company as it was in gain, our other fund, Gladstone Investment. Simply because we have three lenders in this, and two of the lenders are quite desirous of continuing the line of credit and have been very supportive. One has been a little less likely to want to continue.

So we have been working that and I am hopeful in the next three months we will have that ironed out. We have already had a couple of meetings with some of the lenders and began down that road. I am hopeful that maybe even earlier than in May when this line comes up we might have an announcement, very positive, that we have our line of credit in place and we will go for another year.

But right now, I would expect the line to drop by some small amount, not a huge amount. I would expect it to have some room in there for new loans if we want to do them. Right now, we're not very excited about doing the new loans.

You also should know, Greg, that we do have a substantial amount of senior syndicated loans. While the marketplace is not great today, if we wanted to sell them we could probably find some people to buy a few of the loans at some very discounted prices in order to do the next deal.

We just don't feel good about doing that yet because we don't like the way the economy is and the way the marketplace is pricing those loans. Do you have another question?

I will hop back out and let other people ask and come back. Thank you.

Okay. Claudia, next question.

Vernon Plack, BB&T Capital Markets.

Thanks. David, I was curious in terms of how close you were at the end of the quarter on the minimum net worth covenant on your revolver.

I don't know. Gresford, how close were we? What was the difference between -- how far did we miss it?

$2 million.

About $2 million.

Okay, thanks. Other than growing the portfolio, this is tied to the previous question. What can you do other than grow the portfolio in order to close the gap between NOI and the dividend? Are there some other things that you are thinking about?

Vernon, this is Chip Stelljes. We have across the Company probably 60 active projects going on, probably 30 of which are tied to Gladstone Capital. I would tell you that we are actively looking at every single company and saying -- let's get out of the lower-yielding senior loans and revolvers and get them over to the asset-based lenders that David discussed.

We did those in order to facilitate the closing of those transactions; but obviously, we don't make much money on it. The revolvers take up room on our line of credit with our lenders. So if we can get out of those positions and move them over in a refinance mode, we don't take losses and yet we get a higher-yielding portfolio.

So we are actively looking at recycling money that we do get, continuing to delever it, but at the same time get into higher-yielding pieces of paper and stay out of the lower-yielding ones.

Vernon, go ahead. Do you have another question?

No, that was it. Thank you, David. Thank you, Chip.

All right. Next question, Claudia.

I am showing we have no further questions at this time, but let me give another reminder. (Operator Instructions) Greg Mason, Stifel Nicolaus.

Could you talk about -- as we went through the Q looking at your fees, it looks like your advisory fees fell to virtually zero this quarter; and they had been running about $400,000 a quarter.

What is the cause behind that? Are portfolio companies not paying advisory fees right now?

I am just trying to see what you're looking at, because we did get our loan servicing fee and our base management fee. Where is (multiple speakers)?

(multiple speakers) about income.

Oh, advisory fees? Well, advisory fees are typically paid from -- what are you looking at? Greg, which line are you looking at?

Yes, so when you refund fees and --

I'm sorry, that is down at the bottom, yes. I know what you mean now. You mean the advisory fee went from 2.3 to 1.2.

That, again is when we do a transaction, the fee that we charge is an investment banking fee or something like that. That fee comes into the Management Company and then gets credited back.

The reason we do that is because the work has been done by the Management Company; and so it charges the fee, but then credits it back to the portfolio company.

When you don't have a lot of closings, as a result of not a lot of closings and not a lot of fees coming in, that is why it went down.

Okay. Then you talked about you have your three loans on non-accrual; but you talked about two other problem loans. Can you discuss those or discuss the magnitude at least or size of those other two problem loans?

All five of them are $12.6 million.

The two additional loans are approximately 150 days past due. One of those we are very close to being -- getting control of. We think there is value in both loans, but they are not paying interest as agreed, and will be in our list next time of non-accruals.

But again, all five loans are $12.6 million.

Okay. Then, you mentioned that you are trying to get approval to issue stock below book and that there is a strong pipeline if you had the capital. If you look at your dividend yield today, nearly 17%, are you able to find new investments today that would be accretive if you raise capital at these levels?

We aren't going to raise capital at these levels unless it was just some kind of sheer emergency. Again, that is why we are talking about flexibility.

However, if we went back up to something close to book value and we wanted to have some shares issued -- not that we are planning any -- but if we did, and during the roadshow or the three-day whatever we would have the price drop down a nickel under net asset value, we wouldn't be able to have the issues without this permission from shareholders.

The permission is only for a year and it has to be approved by our independent directors as well each time. So again, I hope everyone out there will give us the vote of confidence on this and let us go forward on it.

I did want to add -- and Greg, let me just jump on one thing that Vernon asked about and finish up. We did apply for an SBIC license in this Company. We are hopeful that the SBA will grant us the license. We are going through that process now. It seems to be on a positive track.

No guarantees, but we have all run, as you probably know, I have run four SBICs before. So we think we have a good reputation at the SBA and will get our license.

But the new stimulus package does have one thing for SBICs in that you can borrow more money from the government than you could in the past. So you can borrow up to $150 million through the SBA. Not that we would be able to get all that money right away.

The nice thing about that $150 million is that it doesn't count in your test of 1-to-1 for the BDC test -- business development company test. So as a result, it is like having a freebie in that regard.

And that would be another way, for example, in Vernon's question of how we could build the income of the Company. I am sorry to do that to you, Greg, but I just wanted to make sure I got that in before we hang up.

Did you have another question, Greg?

Yes, one more. We agree completely that your thoughts about raising capital at these levels but you want to have the flexibility. Would you also agree that issuing stock for a dividend at these levels would be just as dilutive to the shareholders?

It would be, except you are diluting everybody and not bringing new people in. So everybody gets the same dilution. It is like a stock dividend.

So it's a little bit different, but you are right, it is very dilutive.

Right, from an ownership perspective, but clearly the next quarter you have that many new shares to pay the dividend on, from --

We agree with your analysis.

Great. Okay, thank you, David.

Do we have any more, Claudia?

Vernon Plack, BB&T Capital.

David, you must have been reading my mind, because actually I was going to follow up on the whole SBIC issue and you addressed it. So thanks very much.

Okay, Vernon. Anybody else out there have a question?

[Fred Mustler], MMA Realty.

Yes, hi. I am involved in the new investments area, and I've been listening to a lot of great financial talk this morning, and I realize that the market is terrible.

But I think that there is a good market to at least pay some attention to in the new investment area. You had mentioned, Mr. Gladstone, that you cannot figure out which ones are best. Maybe if you would reach down to some of the other areas, you might learn a lot.

For example, your Company bought Danco, I think through Boeing Capital about (technical difficulty) years ago. We were influential in that and I happen to know that situation very well. They do a lot of work for Intuitive Surgical, a large, growing robot manufacturer you probably all know about.

There are big opportunities there for synergies, for them to acquire a plastic company right now. I think if you look at those synergies and you look at Danco's earnings, which have to be about the best of any of the companies that are out there, you might see that the $10 million in new loans that might be made at that point might yield two or three years down the line tremendous, tremendous results.

I realize it might be hard to get to $10 million. But what I am suggesting is that by looking at the transaction and getting our heads out of the sand, we may really find some golden eggs, so to speak.

Fred, this is Chip Stelljes. We know Danco very well. Danco is actually a Gladstone Investment portfolio company, not a Gladstone Capital portfolio company.

Oh, okay.

And we are in daily -- we are in weekly contact with Boeing Capital. We are very close to the company's projections and where they think they are going to go with that customer.

I don't want to speak anymore on a portfolio company, especially one that is not part of this Company. But we are well aware of the opportunities there and the situation.

Glad to hear that. I didn't realize it was not the same company.

Okay. Do we have any other questions?

No, we have no further questions at this time.

All right, well, since we have no questions again thank you all for calling in and being part of this conference. We will see you next quarter. 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.