Gladstone Capital Corp (GLAD) 2009 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Gladstone Capital Corporation 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, David Gladstone, Chairman for Gladstone Capital Corporation. Thank you. Mr. Gladstone, you may begin.

Thank you, Claudia, for that nice introduction and hello and good morning to all of you out there. This is the quarterly conference call for shareholders and analysts for Gladstone Capital, NASDAQ trading symbol GLAD. Thank you all for calling in. We're always happy to talk to you as shareholders about our Company and I just wish there were more opportunities but we only do this once a quarter. I hope you will all sign up for email notices. If you are shareholders or are planning to be shareholders get on the email notification list so that you get the information coming directly from our Company to you.

Please remember that if you're in the Washington, D.C. area you have an open invitation to stop by and say hello. We're here in McLean, Virginia, a suburb of Washington, D.C. Just stop by and say hello. You'll see some of the finest people in the business.

Now let me read the statement that I read each quarter. 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 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 and implied by these forward-looking statements, including those factors listed under the caption risks factors in our 10-K and 10-Q filings and in our prospectus as filed with the Securities and Exchange Commission. Those can be found on our website at www.gladstonecapital.com and at the SEC website. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as the result of new information, future events or otherwise.

Let's start now with the President, Chip Stelljes. Chip is the Chief Investment Officer for all of the Gladstone Companies. He will cover a lot of ground so, Chip, take it away.

Thanks, David. As most of you know, we continue to operate in a very difficult environment through the quarter ended 6/30/2009. The environment did no worsen for us but it didn't really improve either.

While there are some new investments being made in the market, the continued instability of financial and lending markets, combined with the downturn in the economy and the lack of much visibility into the rest of 2009 much less 2010, has made us cautious. We did not close any new investments during the quarter just ended and the investment activity of $7.6 million was entirely in existing portfolio companies in the form of additional investments or draws on revolver facilities.

During the quarter we received approximately $55.3 million, due primarily to loan sales but also payoffs, normal amortization and pay downs of revolvers. This resulted in a net production decrease in our portfolio of $47.7 million for the quarter. Since the end of the quarter we've made about $230,000 in additional investments in existing portfolio companies.

Additionally, after the end of the quarter we sold one syndicated loans that was held in our portfolio of investments at June 30th. The loan had a fair value of $6.4 million of which we received all the proceeds as of August 3rd.

We continue to see new investment opportunities. We're being contacted pretty aggressively because so many lenders are still not active. Pricing and structure are attractive. Unfortunately companies that have a positive outlook for the remainder of 2009 and into 2010 are limited, but there are some out there. If we can access more capital we should be able to find them.

The net decrease in investments in the June quarter was $47.7 million from loan sales, prepayments and repayments. This does allow us to further de-leverage.

We continue to look at ways to increase the yield on the portfolio by refinancing our lower yield and senior loans with third-party lenders, while trying to maintain the higher yield in junior debt.

Our deal flow is good, but we'll need to be confident that we understand the economic cycle ahead of those and have the capital to pursue the pipeline of opportunities.

At the end of the June quarter our investment portfolio was valued at approximately $331 million versus a cost basis of $386 million so approximately 86% of cost.

We remain concerned that the use of fair value becomes suspect when there are forced sellers and few buyers or in some cases no sellers or buyers. Even though the values remain stable this quarter, we still believe the valuations are more reflective of the overall poor market for loans, rather than our specific portfolio.

That being said, we continue to closely monitor our portfolio companies' revenues and backlogs to judge where we think the underlying companies are headed.

At the end of the quarter we had loans with three companies on non-accrual and a number of other companies experiencing problems that may prevent them from making timely payments in the future. We've taken operating control of several of these companies and are working aggressively to fix the problems and improve profitability.

On a dollar basis the loans classified as non-accruing have a cost basis of $10.7 million or about 2.8% of the cost basis of all loans in our portfolio. Our portfolio companies are not immune to the current economic climate, so we expect to have some additional non-performing loans and some write offs before this recession is over but we're working very had to keep them to a minimum.

We continue to have a high concentration of variable rate loans so that we participate when rates do begin to increase and all our rates are variable. They often have a minimum rate or a floor so that declining interest rates are mitigated.

About 83% of our loans have floors. However, 13% of our loans do not have floors and with short-term floating rates at all time lows we are generating less income. At June 30th, 2009 we have four fixed-rate loans with a cost basis of $14 million and are approximately 4% of the cost basis of our total portfolio of loans and investments.

Another measure of the quality of our assets is that our average loan ratings for this quarter that just ended remained relatively unchanged. 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 10 representing a low probability.

Our risk rating system for our non-syndicated loans showed an average of 7.2 for this year and 7.3 for the same prior year quarter. The average risk rating for un-rated syndicated loans was 7.0 for this quarter versus an average of 6.5 for the prior year's quarter. As for our weighted-syndicated loans, they had an average rating of triple C or CAA2 for this quarter versus an average of CCC+ or CAA1 for the prior year quarter.

Overall the risk profile has remain constant, according to our risk rating model, and while the risk rating is showing only slight changes in the portfolio, we do see changes that may not be picked up by our risk-rating system. Our companies are not immune to the current conditions, as I mentioned, and we don't want to put all of our trust in a single risk-rating system, as some of the investors did with the rating agencies in the past.

In addition to the quality of assets, the quality of our income continues to bud. As we've discussed before, some Company structured investments are paid in kind or original issue discount structures. This generates non-cash income, which as 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% pay out requirement, so the Company does not receive the cash but has to pay out the income, so we avoid these structures for this reason.

From inception through 6/30/09, we have made loans to 126 companies. We've been repaid or exited from 75 companies. The average return on the exits has been about 8% for syndicated loans and 16% for non-syndicated loans. The returns have dropped some as we booked the loan sales that we announced at the end of last quarter below our costs this quarter.

The senior and second lien debt marketplace for larger and middle market companies showed some signs of improvement, continues to have liquidity problems. At June 30th we had about $24 million at our cost basis in senior and secondly in syndicated loans. This is where we have most of our variable-rate loans without floors and these loans have senior value decline more than the others. Again, during the quarter we sold a number of syndicated loans.

The market pricing for the large and middle-market loans continues to change for senior syndicated loans of $200 million or more. Rates prior to the credit crunch were at about 2.5% over LIBOR. LIBOR, of course, is the lending inter-bank offering rate, which is recognized as the leading indicator of short-term corporate rates.

Now the spreads seem to be closer to 6% over or more. Because these new loans are at higher spreads, the old loans command a lower market price. In light of this, we intended to hold our syndicated loans until they matured because we believe ultimately we'd recover most of our capital if we did not sell them. Though we chose to sell the ones we did at a discount in order to reduce our outstanding indebtedness under the line of credit, of the remaining syndicated loans all our paying as agreed.

In addition to the widening spreads over LIBOR, the norm for LIBOR is really been 5% to 6% historically and was approximately three tenths of 1% at June 30th, 2009 so LIBOR is unnaturally low, given the emphasis on lower end rates worldwide that spur lending and the drop in LIBOR has lowered our income.

Small loan market in which we invest most of our capital is not seeing much competition. Many banks have tightened up their credit standards. The only activity we really see from the banks in our sector is a willingness to make purely asset based loans.

We normally compete with other VDCs and private lenders like Mezzanine Loan Funds, a few hedge funds and some of the small business investment companies out there. Again, our loan request pipeline is still good and if we can access capital and get comfortable with the risk of the economic cycle, it may materialize into more new investments for us as the year proceeds.

Again, our goal is to be a strong, profitable Company, not the biggest Company and, with that, I'm turning the presentation back over to David.

All right. Thank you, Chip. That's a great report. Now let's turn to the financials and for that we'll hear from Gresford Gray, our Chief Financial Officer. Gresford?

All right. Thanks, David. We'll begin with our balance sheet. Our balance sheet continues to remain strong and at the end of the June quarter, we had approximately $344 million in assets consisting of $331 million in investments at fair value and the remaining $13 million in cash and other assets.

We had about $92 million borrowed on the line of credit and about $250 million in net assets so we're less than one-to-one leverage. This is a very conservative balance sheet for finance companies which are usually leveraged much higher. We believe that our overall risk profile is low.

In May of this year we entered into a new credit agreement for $127 million revolving line of credit with Key Equipment Finance, which replaced Deutsche Bank as the administrative agent. BB&T also joined the credit facility as a committed lender. The new facility matures on May 14th, 2010.

Turning to our income statement, for the June quarter net investment income was about $5.4 million versus $6.7 million for the same quarter last year, a decrease of about 19%. The decrease was primarily due to the decline in our investment income resulting for the sale of loans during the quarter, lower transaction fees paid by the portfolio companies, which are credited against our base management fees, and the amortization of deferred financing fees incurred in connection with our prior and current credit facility.

Note that we've also seen LIBOR fall, as mentioned earlier, and the LIBOR continues to remain low. This has negatively impacted the earnings from our syndicated loans. If the rates go back up, however, 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 at $0.26 per share, as compared to $0.32 for the same quarter last year. This is a per share decrease of about 19% again caused primarily by the changes I discussed earlier.

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 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, gains and losses, because they are cash items and second, we talk about appreciation and depreciation, which are non-cash items.

In terms of realized losses for the quarter ended June, we had a realized loss of about $10.6 million, primarily from the sale of syndicated loans during the quarter. Now turning to unrealized appreciation, for the quarter we had unrealized appreciation of approximately $4.4 million. This represents the net change in fair value of our investment portfolio, including the reversal of previously recorded unrealized appreciation or depreciation when gains and losses are realized.

As of June 30th, our entire portfolio is fair valued at 86% of cost. The unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders. However, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution.

As explained in our previous 10-Qs, we have made a change in our valuation procedures to value our syndicated loans using a discounted cash flow method versus relying on third-party indicative bids when we believe that those bids may not be a reliable indication of fair value because of illiquidity in the marketplace.

The marketplace for which we historically obtained indicative bids for purpose of determining fair value for our syndicated loan investments continued to show attributes of illiquidity. Historically our valuation procedures specified the use of third-party indicative bid quotes for valuing syndicated loans where there was a liquid public market for those loans and market price quotes were readily available. However, when there was not an active market the use of these agent assessed non-binding 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 ending June 30th, we determined the current non-binding 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 returned to the market place. As a result, we have valued our syndicated loans using a discounted cash flow method for the June quarter except for the loan we sold after quarter end where we used its sale price and not the discounted cash flow value.

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 June quarter, we have net decrease in net assets resulting from operations of $0.8 million versus a net increase of $2.8 million last year this time. For the June quarter this was negative $0.04 per share versus last year a positive $0.13 per share.

With the continued uncertainty in the current economy in credit markets, investors should expect continued volatility in the aggregate value of our portfolio and now I'll turn it back to David.

All right, thank you, Gresford. That was a good presentation, very thorough. I hope all of you out there, all you listeners, are going to our website or reading our press releases and also obtain a copy of our quarterly report called the 10-Q, which has just been filed with the SEC. You can get that on our website at www.gladstonecapital.com and also on the SEC website. It's a lot of news in there, a lot of information.

The big news this quarter, of course, was the payoff of our primary lender, Deutsche Bank and replacing them with Key Bank as the lead bank and BB&T is a participant. Deutsche Bank was our lead bank, but they told us they were not likely to extend our loan and we took a look at that and said, well we're in pretty good shape because we had the ability to pay off the loan over a one-year period. But rather than do that, we sold a few loans and Key Bank and BB&T increased their loan amounts so that we could payoff Deutsche Bank in May and that ended our relationship with Deutsche Bank.

Our biggest challenge today is the debt marketplace for our funds and also for our portfolio companies. The bank's willingness to provide our line of credit was a great benefit to us but banks are not providing anything more than lines of credit. They're not doing term-loans or long-term term loans for us or our portfolio companies.

We have a new line of credit. It's working fine. It'll be good until next May and we believe it's sufficient for the near term. However, in reality we need to raise long-term debt and long-term capital, like preferred stock or common stock, in order to finance our new investments. And our new investments, obviously, are long-term debts. We make long-term investments, so we need long-term liabilities to go with those, rather than short-term liabilities.

For our portfolio companies we're certainly worried about them not being able to get anything more than lines of credit and in some cases we've gotten good lines of credit for them but it's very hard to get term loans and they need long-term debt as well.

There's a fair number of regional banks that are making new loans based on assets of the business. These asset-based lenders are more plentiful now than they were last quarter, or even the quarter before, and I think this is a very good sign that the credit markets are freeing up, at least for short-term, asset-based loans. But term loans are still hard to find.

On the other front, we're still worried about oil prices. We think they will go up as the economy continues to get stronger and better and that will, of course, put a crimp in everybody's style. We're currently worried about inflation. I don't think there is any need to worry during this quarter or perhaps the next quarter, but you just can't do what's being done in Washington, that is expand the money supply without inflation coming at some point. I fear it'll be a concern in 2010 and where the government is talking about or projecting now to raise as much as $2 trillion during the next couple of years in government paper. Last week they sold the most that's every been sold in one-week period and they got it all off in pretty good shape, so there are still buyers but one has to wonder how much longer there're going to be buyers for that much federal spending, federal debt sales.

The spending at the Federal and state and local governments is still off the charts, although now any of the state and local governments are having to scramble and cut back and that's probably a good sign. But the Federal Government certainly is out of control. Looking at the so called stimulus package, it's just filled with spending goodies from many other supporters of the new administration and those people who are in favor of putting that stimulus package together.

The stimulus spending is dislocating, I think, a lot of the marketplaces. I'm not sure how this will turn out. It looks like we are partly nationalizing a lot of the banks, insurance companies and auto businesses and over time these partially nationalized businesses hopefully will raise equity to take out the government or the remaining government ownership that they have and that would be good but it's going to be a lot of equity to be raised.

The amount of money being spent in the war in Iraq and Afghanistan is still really off the charts and I don't know if you know it but the government has on balance sheet things and off balance sheet and it looks like they keep the Iraq and Afghanistan war off balance sheets so they don't recognized that in all of this spending that's going on.

We're all in favor of our troops overseas. We're certainly supporters there. They're true heroes of this period of history. They're obviously risking their lives for all of us and we hope each and every one of them comes home safely, but we have to recognize that it's still a horrendous expense to our Country and to our taxpayers.

All of this spending will remain, just mean more taxes and I don't think that people can handle any more taxes. It keeps causing dislocation in the economy by continuing to tax and the government has to sell more debt. This causes inflation and there are just many in Congress who continue to call for increased taxes on the so called rich and the definition of rich continues to include more and more of the middle class and I just don't see how the middle class can continue to bear more and more taxes.

The trade deficit with China hasn't gone down much at all. It's still just terrible. China continues to subsidize their industries to the disadvantage of our businesses. They subsidize their oil and gas prices significantly so that it's cheap for their local businesses to buy gasoline and oil, whereas ours is probably two or two and a half times more expensive here.

The downturn in the housing industry and the related disaster in the home mortgage defaults continues to hurt our economy. I don't think anyone knows how many home mortgages will ultimately fail but there's some estimates that put the number at $1 trillion and that's the main cause of this recession. The housing problem will likely turn around this year because housing prices and mortgage rates are falling enough so that it's bringing back in qualified buyers.

In spite of all the negatives, the industrial base in the United States still seems to be going along. It's not a disaster. The recession is having an impact on our portfolio companies and many of the companies we see that come in every day, but again it's not a disaster, which companies are folding up and going away.

The only other thing that's hurting us and our portfolio companies is the lack of bank lending, that is long-term lending, and I don't know when that'll turn around. Short-term loans by asset-based lenders are available, as I mentioned before, but we just don't have the long-term lenders. The banks are not doing that. This is very similar to the 1990 recession, except the Federal Government is pouring money into the banking system rather than taking over the banks. In that period of time they took over 1,100, 1,200 banks. Here they're continuing to lend them money and keep them propped up so they're not taking them over.

Now we believe that the downturn that began in 2008 will continue for the rest of 2009. I know the stock market is indicating that the recession has turned around but one has to go back in history and remember that the stock market has only been 50% right in the past. Now, when the stock market takes off that's a 50/50 chance that the economy has stabilized and turned around.

I do believe the economy is stabilizing and will begin to turn up soon. I'm just not sure if it's this quarter, next quarter or some time in 2010. If that is true and we're turning around and we don't have to catch the wave at the beginning of the turnaround, we can catch it much later. But, if that's true, we can take advantage of it. It would be in a great time for us over the next two to three, maybe even four years, but our plan right now is to seek long-term debt for our funds.

We need to borrow long-term so it would make long-term loans. We are making our rounds to some of the long-term lenders, such as insurance companies, to see if we can raise long-term dept. And this is going to take a while. We're not going to be able to do that overnight but when we announce that we've gotten some long-term debt you'll know that we're back in the marketplace strong making new and better investments.

We need to pay down our short-term debts and replace that with long-term debts. We can't build this Company on revolving lines of credit from -- even from good folks like Key Bank and BB&T. We have applied for an SBIC license at the SBA. We are -- if we are granted the license then we'd be able to borrow, they say, up to $120 million, which would be very significant for us. It's very attractive terms and under that program we can borrow money through the SBA for ten years, interest only, and the rate is only a few percentage points over long-term treasuries.

At this point I can't say whether we'll get the license or not. All I can say is that we have all the paperwork in that they've asked for and we'll just have to wait to see if it's two weeks from now or two months from now or if at all if they're going to award us the license.

We are also looking at issuing preferred stock or something like preferred stock. It would be very expensive today so we're trying to figure out if there's a way of issuing something like preferred stock at a reasonable price. We're not considering issuing any common stock right at this time because stock price is just too expensive for us to do that.

And what I might mention is that to raise money today you have to take a big discount and it's as much as 10% off the current price so you sell it with a 10% discount and then you pay the underwriters 5.5% usually and then there's expenses on top of it, so you end up knocking off 17% off of the price so if you had a $10 stock you're only getting $8.30, so it hurts a lot to do new stock offerings today. We're hopeful that the retail marketplace and other parts of the market will come back so that we can issue some stock some time in the future.

As all of you know, our distributions are $0.07 per month for July, August and September. That's an $0.84 a year. Our projections we did assumed that we're not making new investments so the $0.07 should be in good shape. If we make some new investments we'll be able to push the dividend up but there's no guarantee that we're going to be in that mode in the near term. Obviously at some point in time we'll get back and start cranking up that part of the business.

At the distribution rate in July the dividend on the stock now is at about an 8.5% yield at $9.90 as it closed yesterday, so it's still a good distribution and we hope a lot of folks will step up and buy some more shares and we can move along in terms of raising money.

Please go to the website, sign up for our email notification, www.gladstonecapital.com. We don't send out any junk mail and you'll get the latest word from the Company.

In summary then, as far as we can see economic conditions look like they are changing. We think the economy is reaching bottom. We'll start to gain some strength here we hope as soon we seen enough strength we'll move forward. We just don't know when this bottom is going to be reached, whether it's this quarter or the next two quarters. I think we'll be telling about that. If we are stewards of your money we'll stay the course and continue to be conservative in our investment approach and in our approach to this very unusual marketplace that we're in.

But now, Claudia, if you'll come back on we open it up for questions and we'll hear from some of our analysts and shareholders who want to take time to ask us a few questions.

(Operator Instructions). Greg Mason, Stifel Nicolaus.

David, as we looked the Q last night, you have a table in there that shows your operating earnings by month of roughly $0.10 in April, $0.09 in May and $0.07 in June. Is that June monthly rate of $0.07 kind of a good run rate going forward after the new facility and some of the asset sales you had?

Well, hard to say, I think we'll be better than that but that's a good proxy for your analysis.

Okay and then when you talk about the SBIC license am I remembering this correctly that you would have to fund say the first half of it with your own capital and if that's case I would assume that you would be looking at some of those capital raisings that you talked about to fund that. Is that correct?

It could be. We can also continue to do some sales of our loans. We also have a fairly large amount of repayments due in the next 18 months so we may be able to fund it out of cash flow, had to say at this point but you're right. We do have to do exactly what you say. We have to put up the money first and invest it and then draw down money from the SBA.

Okay great and then you talked about in your Q that you've done $24.7 million of investments to existing portfolio companies over the last nine months. Are your equity sponsors and equity owners also kind of stepping up and supporting portfolio companies in this time?

It depends on which one. Some of them are not in very good shape so we've had to take over recently one of the companies and we now really are the owner of it. But generally speaking those portfolio companies have had their sponsors put up more money and in some cases -- for example, the one we took over, the individual, who is starting as the President there, put up money himself so we had -- that was a good sign obviously. But, generally speaking, the answer is yes and on occasional it's no and we have to do the work.

And then one last question and I'll hop back in the queue. On your new facility you said you adopted FAS159, which is mark-to-market your liabilities. Could you talk about why you chose to adopt 159 today when yields seem low and spreads seem high? Can you discuss 159 and why you chose that?

Yes 159 is really based on something for the future. We're doing it for all of our liabilities because, quite frankly, it's kind of silly to have the asset side of your balance sheet going up and down and your liabilities remaining stagnant so in our estimation all companies should be looking at both their assets and their liabilities. If one is going up the other one should be going up or down and there should be some relationship to that so that if your assets are going down hopefully your liabilities are going down as well and you get a balance out of it. We see it could be -- you could get whipsawed obviously but the goal here is if we are able to layer on some long-term liabilities, then 159 will have an impact. And 159 really doesn't have an impact to short-term revolving lines of credit, so you shouldn't seen any change in that valuation but we're hopeful that somewhere in the future that we'll be able to layer in some long-term debt and we'll be able to value it based on 159.

Great thank you very much.

Vernon Plack, BB&T Capital Markets.

Thanks very much and, David, I know that -- like a little bit more color on the fair value adjustments that you took in the portfolio this quarter. If you exclude reversals it looks like net depreciation was about $4.8 million. Can I assume on some of the earlier comments that that is just the result of lower cash flows from your portfolio companies?

Well, it has to do with a lot of things. One, of course, is that when you value notes you have to price them based on what everyone else is pricing them based in the marketplace, so you do get a comparison and you can have many of our loans trading down even though they're paying as agreed and they're in reasonably good shape. So yes it is due, some to lower earnings in the companies but also due to the marketplace that keeps changing and bouncing around.

I think you mentioned that 83% of your loans have floors on them and I'm just trying to get a sense of the floors. They're obviously good protection now but as -- I'm wondering how far up do rates actually have to go before you lose the benefit of the floor. Rates are so low right now. I know the floor is in place but how much higher does the LIBOR have to go before it actually has an impact on the rates on these investments?

No it would have to -- in some cases it has to go up dramatically. We would four floors, 4% floors, so you've got to move quite a bit before we're going to see an impact on that.

Scott Valentin, FBR Capital Markets.

David, maybe if you could talk about a little big about credit quality, pretty large concentrations in broadcast and in printing and publishing. I'm just curious with the economy being so weak and advertising pulling back what you're seeing in those two segments?

It's seeing a slowdown in both segments. Obviously advertisers in magazines and publications are down. That's a -- and the same thing for broadcasting. The difference in broadcasting and printing versus say some other business is that they have the ability to layoff a lot of people and they can shrink their expenses along with their income but we are hopeful that in the next 12 months those will all come back up. We've seen, for example, some of the print folks cut way back and be able to continue to have very positive cash flow, even though their top line has changed pretty dramatically.

The radio stations have help up reasonably well. We've got some that haven't held up as well as we'd like but generally speaking local broadcasting folks are part of a local economy as opposed to a national economy. They don't get hit quite as bad as say some of the national network radio systems would. But, generally speaking, you're right those are two weak areas but they're at this point in time we're seeing payments come in and we are grateful for that.

Okay and in terms of the portfolio side you mentioned I think this quarter was just reinvestment in existing portfolio companies and you want to get more comfortable with the economic environment but at what point do you start getting concerned about dividend coverage ratio and things like that? I mean how much of that drives your decision whether to grow the portfolio or not?

Well, if the question is will we go out and put a lot of deals on the books in order to jack up the income, the answer is no. We're going to play it safe at this point in time and right now, based on our projections, we don't need to do anything to cover the $0.07 per month that we're paying so we're in good shape. Now, should half a dozen companies or maybe a dozen companies, have real problems, then of course the $0.07 would be in jeopardy. We're not seeing that today so we don't have any forecast that we're going to have to cut the dividend.

On the other hand, if this is the turnaround and say in the fall we're able to land a couple of long-term loans for our Company and then turn around and start putting money out, it will mean that we can crank up the earnings and hopefully crank up the dividend. It's all dependent on which way you view the economy and we haven't gotten comfortable enough at this point in time to say the world is ready to go on another spending spree and everything is going to be okay. So we're still on a hold mode more than ready to put new money out.

And we also want to protect our existing companies so we don't want to use up our money in our -- from our revolving line of credit for new deals and not have money for our existing companies. We are tending to work with our existing companies and help them buy other small businesses, so that they can continue to grow and prosper in a time that we're in now so I don't know, Scott, it's one of those periods of time in which it's just not a clear signal out there that everything is ready to turn around.

Okay and just one final kind of industry question, yesterday was an interesting transaction announced in the BDC space. I was curious if that's consistent, given your experience, is that consistent with where we are in the cycle and do you expect more of that and is there an opportunity for GLAD to take advantage?

Well, we looked at the transaction and decided not to go forward. That's all I want to say about it. But I think there are opportunities out there, probably not for us. We're not very excited about buying portfolios that are really -- you've got to spend a lot of time and a lot of energy in a very short period of time in order to buy a portfolio under duress and it just lends itself to mistakes. And so, as a result, I don't think you'll see us buying a lot of companies. I know we've been approached by a couple of others and we've not gone forward with them so wouldn't look for us in the bidding war that may go on out there.

Our next question is a follow-up from Greg Mason with Stifel Nicolaus.

I was wanting to know, David, if you could give us a little more color on EBITDA trends in your underlying companies? You said they've been negatively impacted but are you seeing that EBITDA trends are still declining rapidly or are they starting to level off, just any more color you can give us on the direction of your portfolio and your take on the economy?

Well, Chip is working that every day. Chip?

Yes I would say that if you looked at the history here that we saw some pretty negative adjustments through the March quarter, I would say some stability in April and May. June seemed to be better and July seemed to be flat to better so, as I said in the very beginning, it didn't -- situations aren't getting any worse. They don't seem to be getting a lot better. You know, we are tracking upstairs. We're tracking backlog; we're tracking order rates and inventory build etcetera. You know, I'd love to say that we're seeing dramatic improvement but we're not, but we're also not seeing a continued drop off in performance overall in the portfolio.

And that goes regardless of industry almost right now. The heavy industries we're in some companies that are related to metal bending and all kind of products that are produced in the metal area and those have seen a flattening out and actually seen some activity that would indicate that things are turning around. In the more service oriented areas we've seen some changes in that that seems to say that we've flattened out but we just need a couple more months, maybe even a quarter, too to confirm it. After it's confirmed and we start to see things going well, assuming we've got some long-term debt, then I think we can turn on the jets and start to take off doing lots of new deals.

Okay and then, as we look through the portfolio, we noticed there's like two or three companies that have debt pieces at zero fair value but you're still accruing. Can you talk through us how that accounting works on those investments with the zero value but still accruing the payments you're receiving?

Yes you know, you can say to yourself that a company isn't -- if you had to liquidate it you'd probably get nothing but it's because it's a service company so you're looking at both liquidation value as well as payment value and it's a tricky thing to do and what we do is try to err on the side of ultra conservatism and making sure that we don't overvalue something so for us it's just a -- I don't know -- it's a habit we've gotten into early in the game.

Most of my career we've played the game in a more conservative manner of sending the signal that if this company had to be liquidated or if it was in -- had to be sold today, it wouldn't be worth very much and that's what we've tried to do. But, again, people are paying as agreed and, as a result of that, we tell you that we're getting the money in but at the same time we're telling you that if we had to liquidate it it would be worth nothing.

And then one last question just to make sure I heard right, you said kind of the average LIBOR floor in that 83% of your portfolio has [fours] is around 4%. Did I hear that correctly?

That's right. There may be a -- 4% there, Chip?

Yes I think we ran it a while back and we thought it was about 4% but we probably ought to re run the number. You probably ought to also remember that we've got a four built into the line of credit as well so you've got some [notching] feature there.

Got it. Okay great. Thank you, gentlemen.

Another question?

David West, Davenport & Company.

David, I wonder if you could just talk a little bit about your comfort factor in terms of utilizing your current line of credit. So fully understand why you don't want to do long-term assets and fund them with a short-term facility but at 37% I think as of the end of June and probably lower today is there a level that you feel comfortable with in terms of borrowing under the current line of credit?

Yes we're about -- what are we, Gresford? 92?

$92 million.

$92 million drawn on the $127 million I think as we approach $50 million we'd certainly feel more comfortable at that level. You know, the biggest problem in the world right now is having confidence that your banks will be there for you. We got thrown a real curve with Deutsche Bank and we are happy that Key Bank and BB&T stepped up but we are one of those Groups that, while we love Key Bank and BB&T, as I told them they could be bought tomorrow by Deutsche Bank and so, as a result, we'd be back in the same position we were before.

So we're just trying to do two things there. First of all, as I mentioned before, get long-term debt but second of all, to diversify our lending base, just as you would expect us to do, and right now we have Key Bank in for a fairly large amount. I think BB&T is in their comfort zone but I'd like to get Key Bank paid down to an amount that I felt comfortable with and that probably needs to get the line of credit paid down to around $50 million and two ways of doing it -- raise long-term debt, pay off the short-term debt, have collections from our portfolio companies, as we expect to do, and pay it down but we need to get to a position where we feel that the banks would not have a problem in continuing their loan.

I don't want to run into the same problem that so many of the BDCs have run into and as we ran into in April and May in which you've got a problem with the banks running for the door saying they want to get out of the credit and not being able to either replace them or pay them off. So we're going to take it very conservative in this Company and get our -- get it paid down, either with long-term debt or with pay downs from our portfolio.

Very good, thank you.

Next question?

I am showing we have no further questions at this time.

All right last chance to hit the phone for one more question. Anybody out there?

(Operator Instructions).

All right that's the end of this conference call. We thank you all and we'll see you again next quarter.

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