Gladstone Capital Corp (GLAD) 2009 Q4 法說會逐字稿

Welcome to the Gladstone Capital con conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Gladstone. Thank you, Mr. Gladstone you may begin.

Thank you, Rob for that nice introduction and hello and good morning to all of you out there. This is David Gladstone, I'm the Chairman and this is our quarterly conference call for all of the shareholders and analysts of Gladstone Capital. We are trading on NASDAQ under the symbol GLAD. Thank you for calling in. We are happy to talk with shareholders about our Company and I wish we had more often, more calls like this, but unfortunately it is just once a quarter. I do hope you will take the opportunity to visit our website at www.gladstonecapital.com where you can find a lot of information about us. You can also sign up for e-mail notices and you will get the notification when we have information that is coming out about the Company in a timely fashion, I think. And please remember that you have an open invitation if you are ever in the Washington DC area, please stop by and see us here in McLean, Virginia just a short drive from downtown. Come by and say hello. You will see some of the finest people in the business, and you are always welcome to stop by and see where the people are that are managing your money.

I need to read a statement about forward-looking statements now. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933, and the Security 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're 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 or implied by the forward-looking statements including those factors listed under the caption "risk factors" in our 10-K and 10-Q filing that is are in our prospectus and filed with the Securities and Exchange Commission, and those can also be found on our website at Gladstonecapital.com and of course they're on the SEC Web site at www.SEC.com. Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

We always start with our President and our President of course is Chip Stelljes, the Chief Investment Officer for all of the Gladstone companies and the President of this one. He will cover a lot of ground, so Chip, why don't you start off, please?

Thanks, David. As most of you know we continue to operate in a difficult economic environment And through the quarter ended 9/30/2009, that environment did not improve materially. While some new investments are being made in the market, the continued instability of the financial and lending markets, combined with the continuing down turn in the economy and lack of visibility heading into 2010 has made us cautious. We did not close any new investments in the quarter just ended. The investment activity of $1.7 million was entirely an existing portfolio companies in the form of additional investments or draws on revolver facilities. During the quarter, we received these payments of approximately $11.3 million, due to loan sales, pay offs normal amortization, and pay downs of revolvers. This resulted in a net in decrease of $9.6 million for the quarter. Since the end of quarter, we made about $1.6 million in additional investments and existing portfolio companies. Additionally after the end of the quarter we sold two syndicated loans held in our portfolio of investments at September 30th. These have aggregate fair value of $2.7 million of which we have received all proceeds.

We continue to see new investment opportunities with pricing structures that is are attractive. Unfortunately companies that have a positive outlook into 2010 are limited. But we are seeing some. If we can access some more capital we believe we can make investments in the rate of return in this environment. As I mentioned, the net decrease in investment assets for the quarter just ended was $9.6 million, and loan sales prepayments and repayments. We use this money to pay down our line of credit which allows us to further deleverage.

We continue to explore ways to increase the yield on our existing investment portfolio by refinancing our lower yielding senior loans with third party lenders and trying to maintain the higher yielded debt. At the end of September-quarter, our investment portfolio was valued at approximately $321 million versus a cost basis of $364 million. So approximately 88% of costs. Although the values remain stable this quarter, we believe that the low valuations are more reflective of the overall core market for loans, rather than the performance of our specific portfolio. That being said, we continue to closely monitor our portfolio companies' revenues and backlogs to judge where we think these underlying companies are headed. At the end of the quarter, we had loans with five companies on nonaccrual and a number of companies experiencing problems that may prevent them from making timely payments in the future. Taken operating control and are working hard to fix the problems and improve profitability. On a dollar basis, the loans classified as nonaccruing at the cost basis of $10 million or 2.8% of the cost basis of all loans in the portfolio.

Our portfolio companies are not immune to the current climate and therefore we may have some additional nonperforming loans and write offs, but we are working hard to keep them to a minimum. We continue to have a high concentration of variable rate loans to we participate when rates begin to increase. While our rates are variable they have a minimum interest rate or floor so that declining interest rates are somewhat mitigated. Approximately 83% of our loans have floors, 2% have floors and ceiling. However 11% do not have floors at all, and with short term floating rates at all-time lows, we are generating low income because short term are so low. The remaining 4% of our loans have fixed rates.

Another measure of quality of our assets is that our average loan rating for the quarter just ended remained relatively unchanged. Our risk rating system tends to measure the probability of default for the portfolio by using a 0 to 10 scale. Zero represents a high probability and 10 represents a low probability. Risk rating system for our new syndicated loans showed an average rating of 7.1 for this quarter and 7.3 for the same quarter for the prior year -- year prior. The average risk rating for unrated syndicated was 7.0 for this quarter versus an average of 6.6 for the prior year quarter. As for the rated syndicated loans, they had an average rated of triple C plus or CAA 1 for this year and the prior year quarter. Overall the risk profile has remained constant according to our risk rated model. While the risk rating is showing slight changes in the portfolio, we do see changes that is may not be picked up, not immune to the current poor economic conditions and we want to avoid relying solely on a single risk rating as so many investors did with the rating agency prior to the economic downturn.

In addition to our quality of assets, the quality of our income continues to be good as we have discussed before we do not intend to generate income from original issue discount structures. But these are generating noncash income which has to be accrued for tax but it is not received until much later as we know some times not at all. This income is subject to our 90% pay off requirements so the Company does not receive the cash, and has to pay out the income. So we avoid those. From inception through 9/30/2009 we have made loans to 126 companies totaling greater than $952 million. Our cumulative net loss has been approximately 3% of total investments since inception. We have been repaid or exit from 78 companies as of 9/30/2009. The average return of the exits has been about 8% for syndicated loans, 12% for nonsyndicated loans. Historical returns have dropped some as we have announced that we recorded last quarter to pay down our short term line of credit.

The senior and second lean debt marketplace for a larger middle market companies has been improving recently. At september 30th, we had a cost basis of approximate $14 million in senior and second lien syndicated loans. This is where we had most of our variable rate loans without floors and these have seen value decline more than the others. We have sold a number of these loans during this quarter. The market pricing for larger middle market loans continues to change for senior syndicated loans of $200 million or greater. Rates prior to the credit crunch were approximately 2.5% over LIBOR, the lender bank offering which is recognized as the lending indicator of short term corporate rates. Data spreads seem to be closer to 6% or more over LIBOR. Because these new loans are the higher spread, the old loans demand a lower market price.

In light of this market without regarding any changes of prices, we had intended to hold our syndicated loans until they mature because we believed ultimately we would recover our capital if we did not sell them but we did choose to sell them. Some of them a number of them at discount in order to reduce our outstanding indebtedness under the line of credit. The remaining syndicated loans all are paying. In addition to widening spreads over LIBOR, the norm has traditionally been 5% to 6% with approximately 0.3% at September 30th, 2009. LIBOR is artificially low giving the lower rates worldwide to spur lending, abnormally low LIBOR has depressed or income.

The small loan market in which we invest most of our capital has not seen much competition, banks have tightened credit standards, currently most banks are only willing to make clearly asset based loans. We normally compete with other BBCs and private lenders a few hedge funds and small bids investment companies out there. Again our loan request platform is still good if we can access capital and get comfortable with the risk and economic cycle, it may materialized into more new investments as we enter our fiscal 2010 year. Our goal is to be a strong profitable company. And with that I will turn it back over to David.

Okay. Thank, Chip. That was a good report. In the last quarter. Now let's turn it over to the financials and hear from our Chief Financial Officer, Gresford Gray.

We will begin with our balance sheet which continues to remain strong. At the end of the September-quarter, we had approximately $336 million in assets, consisting of $321 million in investments at fair value and $15 million in cash and other assets. We borrowed about $83 million on our line of credit and had about $249 million in net assets. As such, we are less than one to one leverage. This is a very conservative balance sheet for finance companies, which are usually leveraged much higher. We believe our overall risk profile is low.

In May 2009, we entered into a new credit agreement, a $127 million revolving line of credit with Key Equipment Finance, a part of Key Banc, which replaced Deutsche Bank as the administrative agent. B B&T also joined the credit facility as a committed lender. The new facility matures on May 14th, 2010. Subsequent to September 30th, we reduced the size of the credit facility by $20 million from $127 million to $107 million and we are in good standing with our line of credit with Key Banc and B B&T. We are required to reduce Keybanc's participation in the line from $100 million to $75 million by December 31st, 2009. And as of today, we have reduced them to $80 million, and have the ability to reduce them the additional $5 million today.

Now turning to our income statement, for the September-quarter, net investment income was about $4.2 million versus $6.1 million for the same quarter last year, a decrease of approximate about 31%. The decrease was primarily due to a decline in in investment income resulting from the exit of loans during the quarter, lower transaction fees paid by the portfolio companies, which are credited against our base management fees, and professional fees incurred in connection with troubled loans. Please note that LIBOR has fallen and remained low which has negatively impacted the earnings from our syndicated loans. Because we have sold many of our syndicated loans, even if rates go back up, we don't expect that our income will increase materially.

On a per share basis, net investment income for the quarter was at $0.20 per share, as compared to $0.29 for the same quarter last year. This was the per share decrease of about 31%, which again was caused by the changes in our balance sheet. As many of you may be aware, net investment income is the most important number to us because this is the number that is closest to our taxable income, which is the income we use to pay our dividend.

Now let's turn to unrealized and realized gains and losses, which is a mixture of appreciation and depreciation gains and losses. I will speak about two categories in this section. First, I will speak about gains and losses because they are cash items, and second, appreciation and depreciation which are noncash items. For the September-quarter, we had a realized loss of about $12.1 million primarily due to the write off of one loan and the sales of syndicated loans. For the quarter ,we had net unrealized appreciation of $11.6 million. This represents the net change in the fair value of our investment portfolio, including the reversal of previously recorded unrealized appreciation or depreciation on when gains and losses are realized. During the quarter ,the unrealized included $9.4 million in previously unrealized appreciation from from loan that was written off. As such, the $12.1 million realized loss we incurred this quarter, as I explained earlier, was partially offset by the reversal of the previously unrealized appreciation, resulting in a net $2.7 million loss for the September-quarter.

As of September 30th, our entire portfolio is fair valued at 88% of our cost basis. The cumulative unrealized appreciation of our investment 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 recent SEC filings, when markets demonstrate characteristics of illiquidity, we are required to value our syndicated loans using the discounted cash flow method. However, in monitoring the market activity during the quarter ended September 30th, we know that changing market conditions indicating a return to liquidity. And a better functioning secondary market for syndicated loans. As such, we used third party bid quotes to value our syndicated loans as of September 30th. However, for the loans we sold after the quarter end, we used a sales price rather than the third party bid quotes.

During the September-quarter, we had another component of unrealized appreciation, which related to our credit facility. As mentioned in our previous 10-Q filing of the June-quarter, we adopted the fair value option specifically for the credit facility. At that time, the credit facility was fair valued at approximate cost basis, however for the September-quarter we reduced, excuse me. We recorded an unrealized appreciation of $350,000, based on estimates of value, provided by an independent third party. Such valuation reduced our net asset value by $350,000.

Now let's turn to net increase or decrease and net assets resulting from operations. This term is a combination of net investment income, appreciation, depreciation, gains and losses. Please note we are talking about the weighted average fully diluted common shares when we use per share numbers. For the September-quarter, we had a net increase of net assets resulting from operations of $3.4 million versus a net decrease of $14.1 million for the prior year quarter. This is a positive $0.16 per share for the current quarter, versus a negative $0.67 per share for the prior year quarter. With the continued uncertainty, and the current economy and credit markets investors should expect continued volatile the I in the aggregate value of the portfolio. Now back to David.

That was a very good presentation. I hope all of our listeners out there will read our press release and obtain a copy of the quarterly reported called the 10-Q and 10-Ks. We filed the 10-K yesterday with the SEC. You can access the Press Release and the 10-Ks and 10-Qs on our website at Gladstonecapital.com and obviously on the SEC website.

I think the big news for this quarter was we continue to make progress with our portfolio of investments and our desire to pay down our short-term line of credit with Key Banc and BB&T. As many of you know, they replaced our primary lender Deutsche Bank. As part of the agreement, we have a requirement to reduce the commitment of Key Banc to $75 million by December 31st, 2009 and after the quarter end as Gresford reported we reduced Key Banc to $80 million are in the process of reducing them to $75 million probably this week we are in the procession of working on it now. Our line of credit will be at $102 million soon. That's plenty of room for our Company and especially since it is short-term, so short-term line of credit. We are happy with our new lenders and have move away. We happy to have moved away with Deutsche Banc, which placed us in a very difficult position when Deutsche Banc decided not to renew our line of credit. They did this to a number of other people in our industry and other industries, so it is not just us that were damaged. They damaged a lot of other companies as well.

Our biggest challenge today is the debt marketplace of the Companies like ours as well as for our portfolio companies that we finance. We have a line of credit with very supportive lending institutions today. That's working very fine, and it is really sufficient for the near term, and by the way, we are having discussions with our lenders now about a renewal of the line of credit, stay tuned for that. We will let you known when he we have finally negotiated those terms and conditions. However, just need to remind you that we need to raise long-term debt and have long-term capital such as the issue of preferred and common stock in order to find new investments. Our new investments, as you all know, are long term. We need long term liabilities to go along with that. We can't rely on a short term line of credit for making long term investments and our portfolio companies we worry they will not have the ability to get either line of credit or long-term loans that they need. They are a fair number of regional banks that are making new loans based on primarily on the assets of the business. These asset based lenders are more plentiful than last year and of course we hope to get banks to finance all of the lines of credit for our portfolio companies, and get out of the business of providing lines of credits to our small businesses that we work with. But we will just have to see how that works out over the next year.

We continue to worry about the price of oil. It is a terrible risk to our economy. Oil prices will probably continue to go up as the economy improves. That's where we see things going. We are currently worried about inflation now. The decision by lawmakers in Washington to expand the money supply will probably cause much more inflation to return. The Government's projecting to issue about $2 trillion worth of Government borrowing such as T-bills and that will fuel inflation as well. And we wonder about all of the spending that the Federal Government is doing now. It is just off the charts.

Look at the so-called stimulus package and it is filled with spending goodies for many of the supporters of the legislatures and the health care bill coming down the pike seems to reward a lot of supporters of the legislatures as well. These stimulus packages as they call them in the health care bill are really dislocating a lot of the markets out there, and we have to worry about that when we are investing and worry about it for our portfolio companies. And I am really not sure how all of this will turn out.

It looks like the Government is nationalizing a lot of banks, insurance companies and the auto business as well the health care area. And this can't be good for the long-term success of our country. As we know, Governments are very inefficient and many decisions are made on politics rather than on business decisions. The amount of money that is being spent on the war in Iraq and Afghanistan is certainly hurting our economy. We are certainly in supportive of our troops, they are, the heroes of this period of history, they risk their lives for us every single day and we pray for their safe return back to the homeland. But the costs are horrendous and as you know, all of that spending is off budget. They don't have that in the budget. So that is over and above what they're spending in the budget each time you hear those budget numbers.

All of this spending means one thing, and you know what it is, that taxes are going to have to increase, and I just don't see how people can handle more taxes. It is going to cause even more dislocation and the Government will have to sale more debt. That will cause more inflation, and many in the Congress today your legislatures are calling for increase in taxes on what they call the so-called wealthy. But their definition of wealthy includes most of the middle class even down to as low as $40,000 a year in earnings. So, we can bet that taxes will be increasing over the, other the coming years. I worry about the trade deficit with China and certain other nations. It is just terrible right now. China continues to subsidize their industries to the disadvantage of our businesses. For example, they subsidize their oil prizes significantly. Oil prices to businesses there are about half of what they cost the Government to buy the oil on the open market. And this of course means that our companies here in the United States can't compete with those businesses and that leaves jobs leaving the United States and going to Asia. It is a sad state of affairs.

The downturn in the housing industry and related disaster in the home mortgage defaults continues to hurt our economy. I'm not sure anyone knows how many home mortgages are going to ultimately fail. There have been estimates as high as $1 trillion. Right now I read this morning one in four homes people own today are under water in terms of the mortgage that they have on the houses is higher than the value of the real estate. Real estate defaults are the main cause of this recession that we have today. It kicked it all off. However the housing problem by our estimates will likely turn around in 2010 because housing prices have fallen so much and mortgage rates come down so much. They're also being subsidized and of course there's a tax credit if you're a first time buyer. All of that will probably bring back qualified buyers into the housing industry in 2010. We are hopeful that will turn around.

In spite of these negatives and there are a lot of negatives, I want to say positives here, the industrial base of the US is not a disaster, it is not going over the edge. It continues to struggle along, the recession is having an impact on all businesses including our portfolio of companies but it is not disastrous one. Like most companies, our portfolio of companies have not seen big increases or any increases at all in revenue or backlogs. Some of them have seen their revenues decline, but most have cut their costs as best they can, in order to keep their profits up. Revenues haven't increased and until we see revenues increase, you won't see the economy turn around. Perhaps that will be next quarter or the next quarter but we are hopeful 2010 will be a good strong year.

The only thing that's hurting us is the lack of bank lending money as has been mentioned before. We need long-term not short-term debt. We have plenty of short-term debt and I am sure that our portfolio of companies over 2010 will be able to get their short-term debt. However, most banks just stopped making long term loans. This is like the 1990 recession except in this case, the Federal Government is pouring money into the banking system and pouring in short-term money into the banking system rather than as they did in 1990, took over the bad banks and sold off the assets. We will see how this strategy, new strategy by the Government will work out in then financial system.

I believe the downturn that began in 2008 will continue well into 2010. I don't see any let up. I am hopeful it continues at the slow pace we are going at now. However I do think the economy is going to stabilize in 2010, and if that is true, we can take advantage of it. This will be a great time for us over the next two to four years if this is the stabilizing, but we are all waiting to make sure that the economy is stabilized before we jump out and start make new loans and investments. Our plans today are to seek long-term debt for our fund. We need to borrow long term because we invest long term. We are making the rounds with some of the long term lenders such as insurance companies to see if we can raise only long-term debt. This will take us a while to get that in place.

We have applied today the SVA for a SVIC license and if the SVIC grants the license, we will will be able to borrow up to $120 million on very attractive terms. By the way under that program, we can borrow money through the SVA for 10 years, interest only for 10 year, at a rate that's only a few percentage points above long-term treasuries. So, ten year treasuries plus a small amount is the rate we can borrow at. It would be very advantageous if the Government will let us have an SVIC license but we didn't know if we will receive it. We are in line, and we are hopeful that they will get to us soon, and issue us a license.

We are also looking at issuing some preferred stock or something similar to preferred stock, but today it would be very expensive if we do find a way to issue preferred stock or something like that in a good price range, then we will certainly consider it and that would help us to generate long-term capital that we can use to make investments, and we have looked at some convertible preferred stock, and that may work for us as well as we continue to look at that area. We are considering issuing common stock but certainly not at this time. The price is just way too low, and that may change as time goes on, so we can raise money either with preferred or common or long-term debt that will get us back into the lending business.

As you all know, the distribution is $0.07 a month for October, November and December. We'll declare the next dividend in January and in our projections when we set up this $0.07, we didn't assume any new investments so if we do start making new investments, it will help our projections and we will exceed them and hopefully continue to grow the business. But obviously, there's no guarantee on that today. We will just do the best we can. At the distribution rate we have in October, at $0.07 a share, at $8 as the stock closed yesterday, the yield on the stock is now about 10.5%. That's a very high income rate considering the Company is strong as it is and continues to go forward at a good pace.

Now, let me ask you all. Please go to our website at Gladstonecapital.com and sign up for our e-mail notification, we won't send out junk mail just good news on the Company. Remember in summary, as far as we can see the economic conditions look like they will change, that we will get to bottom during 2010, that we will start to gain some strength in this Company. We just don't know when that's going to happen. And the next two quarters will be very telling, as we watch the quarter that ends in March, we will have to make some judgments as to whether we have reached bottom or not. As you know, we are stewards of tour money, we will stay the course and continue to be conservative, in our investment approach and continue to have a good portfolio. Well, Operator, why don't you come on now and let's open up the lines to some of the analysts and our shareholders who want to ask some questions.

Thank you, Mr. Gladstone. We will now be conducting a question-and-answer. (Operator Instructions). Our first question is from Vernon Plack with BB&T Capital Markets.

I am trying to understand the interest income line this quarter. If you look at the number, was $9.2 million versus $10.6 million in the June-quarter, which is a 13% decline, and I am trying to fully account for this difference. I know portfolio shrunk a little bit, about 6% and you had additional nonaccruals. Is that, if I add those up that doesn't account for all the difference. I'm assuming maybe there's some timing differences or something else going on there?

Gresford, why don't you answer that one please?

Yes, Vernon, the September interest income number also included the reversal of interest income related to the loan that was written off for [Padanco] during the quarter.

Okay, do you know how much that was?

Not offhand but I will be happy to follow up with you.

We'll put that on the question as an answers in our website if you don't mind, Vernon.

Terrific. Thanks.

All right. We have another question, please?

Yes, we do. That question is coming from the line of Greg Mason with Stifel Nicolaus. Please go ahead with your question, sir.

Great. Thank you. Can you talk about the average LIBOR floor in your portfolio for those investment that is do have a floor?

Do I don't now the --

It is between three and four.

It is between three and four is the floor.

Okay. And could you talk a little bit more about the SBIC opportunity and where you are in the process. Have you officially filed your application yet and waiting to hear back?

Chip, do you want to answer that, please?

Yes, we have. The application has been filed, and we were asked for additional information which we have now delivered to them. We either have or about to receive our comment letter on our application which will drive the legal documentation that SBA requires. So we are in the process. It is just as David said a question of how quickly they will get to us and make a decision.

Great. And do you have any kind of timeline that you guys are thinking, or hoping about that you are willing to share? For the completion of that license.

We have made so many estimates on that I am afraid to do it. SBA is working I am sure as hard as they can. We had a gentlemen over here about a week or so ago it seems to me, in which he came over for again to ask questions, and get more information, and we have provided that. So we are hopeful that this final letter will come with the final questions, and that it will move quickly through the process. But we have no control over that whatsoever. And my guess is we are probably two months away, but that's again a really rough guess.

One last question, are you able to get separate licenses for Gain, GLAD and Good or do they view your entity as one whole for the license process?

No. We can have a license in both Glad and Gain. What we want do is get one for our real estate company. SVICs are precluded from doing those real estate transactions. It would be inappropriate for us to apply through Gladstone Commercial. But our hope is to get the license for Gladstone Capital this company, soon and make a success of that so SBA would like us to get the license for gain as well.

Great. Thank you, David.

Next question, please?

Thank you. (Operator Instructions). Our next question gentlemen is from the line of David West with Davenport and Company. Please go ahead with your question, sir.

Good morning. In fourth quarter it looked like your professional expenses were in excess of $800,000 materially higher than it had been if prior quarters. Any particular activity drive that figure?

Yes. Chip is going to answer that.

Yes. We had significant professional fees, outside of the normal recurring professional fees that we get at quarter, at year-end in the Company. We had significant ones related to portfolio company issues. The primary one was the bankruptcy and write off of the [Padanco] had significant legal expenses associated with that chapter 11 filing. So those are, I would think those are behind us now. We should not see those going forward. Its an unfortunate result on that particular investment all around.

Okay. Very good. And I guess just more subjective question, and obviously there were some, somewhat nonreoccurring unusual items that depressed the top line this particular quarter. But do you think you are getting close at some point to starting to make new loans at this point in the cycle?

I do think the process that we have been going through is to make sure that our short-term line of credit was in place and paid down to the amount that they wanted us to have it at. As you know, the existing line needs to be reduced by May to $50 million for Key Banc but they're now in here telling us that they would like to talk about renegotiating our line of credit. So we don't know where that's going, but I think it would be viewed as a positive they have come back and are starting to talk with us again. But it is just too early in the process of discussing that to make any projections about where that will go. And I am hopeful that during the quarter, we can find some long-term debt from some two or three institutions and raise $25 million to $50 million of long-term debt, that would help us a lot as well.

Thank you very much.

Okay. Do we have any other questions?

Yes, we do, sir. Our next question is from the line of Scott Valentine with FBR. Please go ahead with your question.

Good morning. Thanks for taking my question. You answered part of the question in the last response, but we are trying to get a sense of when you would resume making loans and I know you are making portfolio investments but is it more you don't feel the returns are adequate or you mentioned getting the credit situation straightened out more of an asset liability matching issue.

It is certainly the latter. We don't want to make long-term investments with short-term debt. That is what probably destroyed a lot of people in the industry. And it certainly was one of our downfalls of using a very large line of credit with someone we thought was going to roll over the line of credit because they given us many promises along those loan lines. We're not going to go down that road of having a large short-term line of credit and using it to make long-term investments. So that certainly on our mind and that's why I have mentioned so many times we need to raise long-term debt before we can get into the marketplace of making new investments.

But second of all, the marketplace is very uncertain. We looked at any number of transactions and decided against them or just past because we thought the economy was not strong enough and there are a number of economists that keep saying to us there's going to be a second leg down and to be careful. So we are being careful. I think it is both ways. However if at this point if time we were able to raise a reasonable priced long-term debt or equity, we could probably find any number of transactions that would be satisfactory to us and let us do it. But right now we are hampered by both of those, the uncertainty in the marketplace as well as the lack of capital in the marketplace.

Okay. But in term of the pricing of assets and the competition, you feel comfortable making those.

Yes, pricing is all moved back up. If you look even at the marketplace that you can view, the senior syndicated you are watching transactions there priced out at in the position we would be taking, in 10% and 12% current pay, we think that we can get those kinds of rates quite easily with equity options as well. So the marketplace is where it should have been all along because the risk reward is, that's where it would take you to in term of pricing deals. The pricing in the marketplace is not the problem anymore as it was two years ago. Pricing was the problem but it was so bad you didn't feel like the risk reward was there. Today pricing is not the problem, the question is what's the risk associated with that transaction today given the current economic down durn. So we have to raise long term capital first to make long term investments. We might raise it from having SBIC if we get an announcement we will have an SBIC, that would be a very positive news ant doing new investments. I want to warn you we will be picky unless we see open running room and things clearing up so we can make long term investments without feeling like we might get another downturn in the economy next week or next month.

Okay. Thank for the commentary.

Okay. Next question, please.

Yes, the next question is from Greg Mason with Stifel Nicolaus.

Thank you. One additional follow up, if I understand correctly, just trying to get my hands around the SBIC opportunity, I think the new rules in the SBA is that you have to fund your equity portion before you can draw the debt. Is that correct? And how much then of your own capital do you have to put up to get that debt?

You do it in stages, you can put up some of your equity and draw down money and put up more and draw down money. It is a process you go through. You don't have to put up every single dollar before you can draw your first one. There are obviously some very small SBICs that are never going to hit the limit that you can get from SBA. They might be $15 million in equity and only draw down $30 million from SBA. So you can incrementally go along in that process.

You don't have to start off by stating if you if you want to combo for the full 150, you can ratchet it up as you get equity.

That's right. You can have a small SBIC, they're not requiring you to have a large SBIC on day one.

Great. Thank you.

(Operator Instructions).

Any other questions?

There are no further questions at this time, Mr. Gladstone.

Thank you all for attending our meeting. I hope to see you next quarter and hopefully we have a lot of good news. That's the end of this conference call.

This concludes today's conference. You may disconnect at this time. Thank you for your participation.