Gladstone Capital Corp (GLAD) 2011 Q3 法說會逐字稿

Good morning and welcome to the Gladstone Capital Corporation's third-quarter ended June 30, 2011 shareholders conference call. All participants will be in listen-only mode. (Operator Instructions).

Please note that this event is being recorded. I now would like to turn the conference over to David Gladstone. Mister Gladstone, please go ahead.

Thank you, Keith, for the nice introduction and hello and good morning to all of you. This is David Gladstone, the Chairman and this is the quarterly conference call for shareholders and analysts of Gladstone Capital, trading symbol GLAD. Thank you again for all of you calling in. We really enjoy these times that we have together and answering questions that we will do at the end.

I hope you all take the opportunity and visit our website gladstonecapital.com where you can sign in and sign up for e-mail notification so that you can receive the information in a timely fashion about the Company. And always, please remember that if you are in the Washington, DC area, we are just outside of Washington, DC in McLean, Virginia, so stop by, say hello. You'll see some of the finest people in the business.

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 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 expressed or implied in those forward-looking statements including all those factors listed under the caption Risk Factors in our 10-Ks and 10-Q filings and in our prospectus as filed with the Securities and Exchange Commission and can be found on our website at www.gladstonecapital.com and also on the SEC's 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.

As always, we start with the President of the Fund. The President is Chip Stelljes. Chip is our Chief Investment Officer. He is also on the Board. He is the Chief Investment Officer actually of all the Gladstone companies and he will cover a lot of ground for us. Chip.

Good morning. We closed 14 new investments during the quarter, totaling $56.9 million and we invested $9.3 million in existing portfolio companies in the form of additional investments or draws on their revolver facilities. During the quarter we received repayments of approximately $4.6 million due to payoffs, normal amortization and paydowns of revolvers.

So, in total we had a solid net production increase in our portfolio of about $61.6 million for the quarter and we funded the net increase in production from operating income and draws on our credit facility.

This is the second quarter in a row where we have had solid increases in our investment activity, totaling a net production of approximately $80 million over the two quarters. Much of this production has come from larger middle market companies through the syndicated loan market. We believe there are many attractive investments in this space, coupled with some decent liquidity.

Since the end of the quarter, we've funded about $450,000 in additional investments to existing portfolio companies and, after the end of the quarter, we received $1.9 million in repayments, which was primarily scheduled principal amortization.

At the time of this call, the amount that we owe on our line of credit is about $102.5 million. And since our line of credit has $127 million in capacity, we are currently working to expand the line to increase our availability to make new investments.

We continue to see new investment opportunities. There seems to be a good deal of capital in the market for the right fields and while competition is increasing, we still believe we can find good attractive opportunities.

At the end of the June quarter, our investment portfolio was valued at approximately $299 million versus a cost basis of $375 million or approximately 80% of costs. The decline quarter over quarter was about $18.8 million coming from companies with continuing or new performance issues.

At the end of the quarter, we had loans with six companies on non-accrual and a number of companies experiencing problems that have prevented them from making timely payments and it may prevent them from making timely payments in the future. We have taken operating control of a number of these companies and we are working hard to fix the problems and improve profitability so that they can pay us.

On a dollar basis, the loans classified as non-accruing have a cost basis of $30.7 million or about 8.2% of the cost basis of all investments in our portfolio. From a fair value perspective, the non-accruals' fair value represents about 1.5% of the fair value basis on investments.

We continue to have a high concentration of variable rate loan so that we should have higher income when rates begin to increase and while our rates are variable, they usually have a floor so that declining interest rates are mitigated and approximately 85.6% of our loans have floors. We are, even with this high percentage of floating rate loans, having floors with short-term floating rates remaining at all-time lows. We are still generating less income than we did in the past. About 6.5% of our loans don't have floors and the remaining 7.9% of our loans have fixed rates.

Another measure of the quality of our assets is that our average loan rating for the quarter that just ended remained relatively unchanged. Our risk rating system attempts to measure the probability of default for the portfolio by using a zero to 10 scale. Zero represents a high probability of default and 10 represents a low probability. Of significance, our risk rating system for our non-syndicated loans which constitutes 68.6% of our loans showed a weighted average rating average of 5.7, which is down from 5.9 in our prior year end. As for our rated syndicated loans which make up 24.8% of our portfolio, they had a weighted average rating of B minus, B3 for this quarter down slightly from a B plus, B2 at our prior year end. Our unrated syndicated loans represented 6.6% of our portfolio and had a weighted average rating of 7.5% up from 7.0% at prior year end.

Quality of the income continues to be good. As we have discussed before, we try hard to avoid income generated from paid in kind or original issue discount structures. These generate non-cash income which has to be accrued for book and tax, but is generally not received until much later and as we know sometimes not at all. This type of non-cash income is subject to our 90% payout requirement. So we would be paying out cash that we have not yet received.

As for the marketplace, the senior and 2nd lien debt marketplace for larger middle market companies continues to improve. Most of our new investments this quarter primarily come from these larger middle market companies, which is reflected in our cost basis of senior and second lien syndicated loans of $93.2 million at June 30, 2011, up from $45.1 million at March 31, 2011, and $18.7 million at December 31, 2010.

Some of these loans were broadly syndicated while others were smaller, what we might call club deals. Again we think they are good opportunities and attractive investments in this space, coupled with some liquidity.

The market for loans to companies at the lower end of the middle market is seeing more competition. Most banks continue a policy to tighten credit standards especially for companies at the lower end of the middle market. And so many banks are making purely asset-based loans although we are seeing an increase in non-bank lending and [net net] of all these conditions, we still feel we have a good market opportunity.

The loan request pipeline is still full and we hope to show you some good investments over the second half of this calendar year. And with that I'll turn the presentation back to Dave.

All right, good report. Now let's turn to the financials and for that we will hear from David Watson, our Chief Financial Officer. David?

Good morning, everyone. I will start with the balance sheet. As of June 30, we had approximately $314 million in assets consisting of $299 million in investments at fair value, and $[15] million in cash and other assets. We borrowed $92.2 million on our line of credit and had approximately $218 million in net assets.

Therefore we are less than 1 to 1 leverage and this is a conservative balance sheet for a finance company which are usually levered much higher. So we believe that our overall risk profile is relatively low.

Moving over to the income statement. For the June quarter, net investment income was approximately $4.5 million versus $4.4 million for the same quarter last year, an increase of 2.4%. This was primarily due to an increase in interest income resulting from the increase in the size of the Company's investment portfolio, partially offset by a higher incentive fee for the quarter ended June 30, 2011. On a per-share basis, net investment income for both quarters was $0.22 per share.

For the nine months ended June 30, 2011, net investment income was $13.6 million or $0.65 per share as compared to $13.3 million or $0.63 per share for the prior year period, an increase in net investment income of 2%. Net investment income increased primarily due to lower interest expenses resulting from lower average borrowings outstanding and the reversal of related fees during the nine months ended June 30, 2011, partially offset by the decreased investment income.

Investment income decreased due to a smaller interest-bearing portfolio due to principal repayment subsequent to June 30, 2010, partially offset by a higher weighted average yield, which primarily resulted from the repayment of loans with lower stated interest rates and a restructure of certain loans into higher interest rates, partially offset with a purchase of syndicate loans bearing lower interest rates than our existing proprietary debt investments.

Let's turn to realized and unrealized changes in our assets. Realized gains and losses come from actual sales or disposals of investments. Unrealized appreciation and depreciation comes from our requirement to mark our investments to fair value on our balance sheet with the change in fair value from one period to the next getting recognized in our income statement.

Unrealized appreciation and depreciation is a non-cash event.

Regarding our realized activity for the June 2011 quarter end, there were minimal realized gains and losses. For the June 2010 quarter end there was $2.9 million in realized losses primarily related to the write off of Western Directories.

From an unrealized standpoint, for the June 2011 quarter end, we had net unrealized appreciation of $18.8 million over our entire portfolio. The decrease was primarily due to depreciation and the debt of certain of our Company's portfolio investments, most significantly Newhall Holdings Inc. which was privately due to decreased performance and liquidity concerns. Our entire portfolio was fair valued at 79.8% of cost as of June 30, 2011.

The cumulative unrealized appreciation of our investments does not have a direct impact on our current ability to pay distributions to stockholders but does indicate that the value is lower and there may be future realized losses realized losses that could ultimately reduce our distributions.

For the quarter ended June 30, we recorded an unrealized appreciation of $0.1 million on our line of credit which is primarily based on estimates of value provided by an independent third party. On our balance sheet as of June 30, we had a cumulative net unrealized appreciation on the line of credit of $0.5 million, down from $1.1 million at September 30, 2010.

Let's turn to net decrease/increase in net assets from operations. This term is a combination of net investment income, unrealized net appreciation or depreciation, and realized gains and losses. For the June 2011 quarter end, this number was a decrease of $14.3 million or $0.68 per share versus a decrease of $1.7 million or $0.08 per share in the prior year's June quarter.

The year-over-year change is primarily due to the $18.8 million in unrealized depreciation and investments in the current quarter when compared to $1.6 million in unrealized depreciation recorded in the prior year quarter.

While we believe our overall investment portfolio is generally stable despite recent markdowns, today's markets move fast and are generally volatile. And investors should likewise expect volatility in the aggregate value of our portfolio.

Lastly, we forecast that 100% of distributions paid in fiscal year ending September 30, 2011 to be covered by taxable income which we believe highlights our commitment to predict growth. And now I will turn the program back to David.

All right. Thank you very much. Good presentation.

I hope all our listeners will read our press releases and study our Quarterly Reports. These are called 10-Qs and 10-Ks. These are filed with the SEC and you can access those as well as press releases and other items on our website at www.gladstonecapital.com and also on the SEC website. The SEC website by the way is www.SEC.gov so they are all there.

I think the big news this quarter is we continue to make progress in our portfolio companies, some of which are getting stronger and as the economy gets better, hopefully others will continue to go along but we do have some that are still struggling. Also, the quarter we'll see our backlog of opportunities to lend money is increasing and I think that will continue as we become stronger and move into the marketplace.

Also, we have added a lot of new investments to our portfolio of loans and those assets continue to increase in value. It should help increase the income as time goes on as well.

As a side note, most of these new loans were syndicated loans and you'll note that one of the syndicated loans was purchased before in the recession. That paid off in full. These exits demonstrate our ability to pick good investments and we believe that if the bank, Deutsche Bank, had renewed our line of credit in 2009, we would have paid back all of these with interest and I just hate to see that happen when we had to sell them at such a huge discount in 2009.

Our biggest challenge today is long-term debt marketplace for our Company. We have a line of credit with supportive lenders -- lending institutions and in fact we are not too far away from increasing the line of credit. But this is a short-term line of credit so we will have to find some long-term funding solutions for our Company, and in order to make a lot of long-term investments, we need to raise long-term debt, long-term capital of some sort such as preferred stock.

Our new investments are long term so we need long-term liabilities to match those durations. It is always a fallacy to have a lot of short-term debt on your balance sheet and not have a way to take it out. We really can't rely on short-term lines of credit for our Company over the long term and we are talking to some financial institutions about that. But we are not in a position to move forward with them as yet.

Really, the long-term lenders like insurance companies are still not financing a lot of small companies like ours. But that will change. They are continuing to study the industry and we get some good traction from them from time to time.

For our portfolio companies, it's also the same problem. We worry too that they'll not be able to get long-term senior loans at reasonable rates. There are a fair number of regional banks that are making new loans primarily based on the assets of the business, but these asset-based lenders are much more plentiful than they were last year. But it's just that. They are asset-based lenders and we hope the banks can extend long-term loans to our portfolio companies as time goes on as well.

And I think the banks are much better this year than they were last year and they continue to get stronger as they work through their problems on their portfolio.

We do have worries that we worry about. Of course oil prices have come down. They are, around, I think $91, $92 a barrel now and that's because of the sluggishness of the economy. But oil is still on a priority list of high cost and so we watch that because it has such a big impact on transportation costs.

We are worried about inflation, the decision by Congress and the President of the United States to expand the money that we have outstanding. That is in the form of borrowing more money using T-bills and printing more money as they continue to do is -- eventually will cause inflation. The government is projected to issue trillions of dollars more now in T-bills and the government really is sopping up most of the credit that's out there. They're certainly sopping up a lot of the credit at the banks.

The spending by the federal government continues to be off the charts. You hear all this noise about cutting spending, but if you look at what actually happens, much of it continues as usual. The stimulus package that went down was filled with spending goodies for many of the supporters of the legislators and the government is now borrowing $0.43 of every $1 they spend and it may be as high as 50% in this year that we are in now.

The amount of money being spent on the war in Iraq and Afghanistan is hurting the economy. Gosh, we all support our troops. They are the true heroes of this period in history. They lay down their lives for us every day and we hope they will be safe and return home, but we know the war is costing taxpayers a tremendous amount. But the cost still is not as much as considering all the young lives that are being lost in these wars.

And the government is still on a course to increase spending. It's just a matter of time before they raise taxes and we now know that taxes are slated to go up on January 1, 2013, for a fairly large increase. And I always love it when the government talks about tax simplification because that usually means tax increases for the middle class.

The trade deficit with China and certain other nations is just terrible. China continues to subsidize their industries. They subsidize oil for example with a large amount of dollars and they subsidize significant amounts of other parts of the industry. And this just means that our companies can't compete with them and jobs leave the United States and go to Asia.

So we watch these companies. And the United States, many of them decline because they can't compete with China.

Every time we do a transaction, for example, we always ask the China question as how would a company that's like the one that we're looking at in the United States be able to compete with a Chinese company? And sometimes we pass because we can't see how they could survive if the Chinese decide to go into that marketplace.

The downturn in the housing industry is still related to just all the mortgage defaults that have gone on that continue to hurt the economy. I don't think anybody knows how many home mortgages will ultimately fail. There have been estimates that half of the mortgages out there are greater than the values of the houses. So that would mean that there are trillions of dollars yet to work their way out and that is the main cause of this recession is a lack of a quick recovery due to the housing market place, the enormous number of jobs that were destroyed when the housing industry fell apart.

And today, as all of you know, the government is still the largest guarantor. They are guaranteeing most of the mortgages that are made today. So that industry even in it -- even where it is today is still being propped up by the United States government.

In spite of all those negatives that we worry about, the industrial base today is still not a disaster. The lingering recession is having an impact on our portfolio of companies, but in essence it's still not a disaster like it was in 2008 and 2009.

And like most of the companies, some of our portfolio companies have not seen an increase in revenues or in their backlogs. However, others are seeing tremendous increases and others are seeing absolutely unbelievable increases. So it's a very uneven recovery that we are going through. I believe the downturn that began in 2008 will continue for the rest of 2011 and in terms of growth, I just don't see any growth.

As you know, the first half of 2011 has been in essence no growth to speak of. I am not sure we are going to get much in the second half as well.

However, we do think the economy has stabilized at this low point and there -- and it will be there for a while. Manufacturing growth is still very poor and much of that is simply because we gave a lot of those jobs to foreign countries like China. If we have stability here at this point, as we believe we do, even with no growth we can make some very good investments in small businesses that have sensible markets that they can continue on.

Let me turn now for the final wrapup. Our distributions are still $0.07 per share for each of the months July, August, and September. That's $0.84 a year at the distribution rate that we are going at now and dividends with where the stock price is -- $8.94 yesterday. The yield on the distribution is now high. It is 9.4%. Stocks trading at 86% of net asset value. The net asset value being $10.34 and the value of our portfolio is 80% of cost.

So a lot of depreciation and strength in the portfolio not going down from here. I think we will see an upturn over the next 12 months.

Finally, please go to our website, www.gladstonecapital.com, and sign up for e-mail vacation service. We don't send out junk mail. Very conscious about sending you out mail only about our Company. You can now find a lot of information on Facebook. We are under D Gladstone Companies and you can follow is on Twitter as well at Gladstone Comps. C-O-M-P-S.

In summary, as far as I can see the economic conditions are looking like they are changing for the good. I don't think that we are going to see a second downturn. I think the economy has reached bottom and will start to gain strength. The next two quarters will be very telling, I think.

We are stewards of your money so we will continue to stay the course and continue to be conservative in our investment approach.

So at this point, Keith, if you will come back on, let's open up the lines to the analysts and our good shareholders who want to ask some questions. Let's begin the questions now.

(Operator Instructions). Troy Ward with Stifel Nicolaus.

Good morning. Just a couple of quick questions. Starting on the liability side, can you give us an update on how you are looking at your current capacity for future growth? As you said on the call, I believe, your $127 million is your capacity on your borrowings and you are currently as of today at $102 million. So which obviously is only about $25 million. How do you view that $25 million versus liquidity needed on the balance sheet for, let's say, your revolving lines of credit versus future growth?

Well, obviously, we aren't going to go up to $127 million, but we do have in the pipeline an increase in that. I hope we can announce it soon. It will be a small increase. We are not talking about hundreds of millions, obviously.

We are also talking with some long-term financing and I am hopeful that that can be announced this month as well. And so those are the two approaches that you have. You can either sell some form of equity or get some form of debt long term, hopefully. And we'll just have to see how that works out. I am really not in a position to tell you much about that, but stay tuned. I think you'll see it in our press releases.

That's very positive news that you are even talking about long-term potential for, gosh, eight, 10 quarters it seems like. And now you think maybe something could be done as early as this month. Is that right?

I think we'll see something this month or next month that will be in the press releases. And the second side of that is that you ought to know that a big chunk of our assets are in the senior syndicated loans. With the market out there, we can sell them. The marketplace has been relatively hot. Most of them were sold at discounts at [97.5 or 98] as a price and most of them have perked up from there.

So we can probably sell them as small gains to date and there is relative liquidity. So if we found a deal that we liked more than what we have in senior syndicated loans, we could just sell those off and put the money to work. So there is liquidity.

If you remember, that was how we saved ourselves from the clutches of Deutsche Bank is that we have a number of syndicated loans. And we were able to sell them because there was a market for them where there was no market at the time for loans like we do, our proprietary loans. But there was a loan, albeit we were selling them at $0.80 and $0.85 on the dollar, but there was a market place.

And we took a hit, but we were able to pay off the bank because they wouldn't renew our line of credit. So there is liquidity there beyond just looking at can you increase your debt, can you increase your equity. We can always sell off these should we need to do so.

Right, but it would be more of a churning of the portfolio. I think the weighted average yield this quarter of the syndicated loans you added was about 10.3%. So if you find a deal that you like up in the 12%, maybe a little bit higher kind of brains, you could -- you are saying you could gain a couple of percentage points that way.

Gain a couple of percentage points and have an upside because usually those come with additional equity enhancements as we call them. Sometimes called loans that have extra points that are not accruing on the books, but will get paid when the loan is paid off. So you could look at those as 15% to 18% kind of numbers as opposed to 10%, the way the syndicated loans are today.

Okay, great. And then thinking about the debt to equity, if we do start thinking about increased capacity on the leverage side, where are you comfortable? You're at -- call it 43% debt to equity today. Where are you comfortable taking a leverage in the portfolio?

Well, I really don't mind taking the portfolio up to 70% or 80%. You never want to get up against your maximum 1-to-1 leverage, but there is no reason if you have good long-term assets on the left-hand side with leveraging a company up to almost 1-to-1.

As you probably know, I know you know this in detail, most finance companies, you take GE 11-to-1, you take others at even higher numbers. We aren't -- and certainly banks are leveraged very high. We don't think that the -- and it's all back to the fact that you can't leverage these companies up very high. We don't think that a small amount of leverage up near the 1-to-1 is a reason to get excited about as a negative in our case. We think it is actually a positive if there is good spreads.

And when you talk about adding to the leverage side, hopefully, in the near-term, what kind of level do you think that will allow you to get to on an overall beverage basis with the additional capital?

With additional capital, your leverage --

With additional leverage, I'm sorry. With the additional leverage.

With additional leverage, I think we could get to about round numbers, 60%, 65% pretty easily.

Okay. Moving quickly to the asset side. And one of the things that I did when I was looking at your portfolio companies late last night, was I tried to figure out the new ones. And I think in the release it said there's 14 new portfolio companies. Actually I was only able to locate 12. Did I miss a couple or were there a couple investments that you made in the quarter that refinanced intraquarters where they are not showing up at June 30?

You are going to try to make us do that online (multiple speakers) real quick. Go ahead, Chip.

We have a list. I can run through them with you. And they're the -- the loans that are -- were booked in this quarter are Targus, Springs Window, Altera Drilling, Schramm, Wall Street Systems, Hubbard Radio, Mood Media, Attachmate, Census Metering, excuse me, Ernest Health, Vision Systems. We have a new investment which is really a new deal for Triangle Metals that may have been included as a new deal. It's really an existing portfolio company, but the whole thing got recapped and they made an expansion of the business that we financed.

So I'm not sure where that got classified, but we did fund that. Arvana, Vision Solutions, and I believe the only one, other one, is Westlund.

So I missed Arvana. And what was the one you said that was already in the portfolio, that got redone?

Triangle Metals.

Triangle, okay. I'm sure that was it. Okay.

Was that included as a new investment because of the significant changes or not? We may even still be missing one. That's the list we have. We will find it for you.

Yes, well, I will follow up with you. And real quick, David, can you give us an update -- you talked about Newhall in particular. It looks like Newhall and Sunshine Media accounted for the bulk of the write-downs in the quarter. Can you give us an update on where you are headed there? Especially with Newhall. It looks like you have restructured that a couple of quarters ago, added another traunche of debt. Is there a hope there that you're trying to keep one of the traunches of debt from going on nonaccrual?

Yes, of course. Newhall has its problems, but on the other hand, we have people that want to buy the company. So we are currently contemplating which direction to go, whether to sell part of the assets, all of the assets. They have new products that seem to be taking hold in the market place.

It's a story that hasn't been written yet. We have got a lot of things going on, and it may be that we end up selling part of it or we keep it and build it back up.

For us right now, that's sort of at a pinnacle point and we have got new people in there working on it. So we'll have to defer on commenting about Newhall until next quarter just to see how it comes out. But Chip, do you want to talk about Sunshine?

Yes, I mean Sunshine is -- I would argue there is not a material difference in the business. This continues to be, if you recall, two different businesses. One of which is in a business model transformation and has been and we talked about it last time. That as evaluation continues to reflect the fact that profitability is low and in fact we are probably plowing some capital into the new initiatives as we go forward on that deal.

But it's got a ways to go. We have got a strong management team, strong CEO. As you know, we announced last time we are now 50-50 owners with the CEO there and his management team. And so I think the interests are aligned and we are continuing to work on the Company. It's got a lot of moving parts and a lot of good things happening, but as David says, too early to really know whether it's going to work out the way we want it to.

We think there is a good bit of upside in it, but right now it's get it back on track first.

And, Troy, you should know that since Standard & Poor's gives us an actual percentage that these loans are worth, they are always backward-looking. They don't look forward at projections. They don't look at changes that have been made that impact the future. They just do numerical lookbacks.

And at this point in time when the see the situation that it is in, they take a very dim view in order to protect themselves, I'm sure, from criticism. If I were valuing these companies, I probably wouldn't discount them that great, but then I can't do that. We have S&P doing that.

Understood. I will hop back in the queue for my other questions. Thank you.

Okay. Next question, please.

David West from Davenport.

Good morning. I was a little late getting on the call so I apologize if this has already been discussed, but when you talk about your pipeline of activities, is this -- or potential new loans, are these still mostly syndicated credits or are you also seeing good opportunities in the non-syndicated area?

Chip, why don't you take that?

Yes, just as a sort of an overview of syndicated loan marketplace, and we kind of look at that as a window. At times the syndicated loan marketplace brings together deals that we think are attractive companies with good sponsors that are structured right, that have good risk return. Other times, they are not. We don't see the deals or we don't like them and so we have a group of deals come through that we really thought very highly of I would say that's definitely slowed in the majority of the pipeline today are proprietary investment opportunities.

So, Dave, just to make sure you understand, I would say at this point in time, the senior syndicated loan marketplace is very strong. Lots of people bidding, lots of crazy things going on. We are not really a buyer in that marketplace, but we bought some loans before it went kind of crazy and they have gone up in value. So at this point in time, we are kind of sitting on the sidelines for senior syndicated loans and looking more to the proprietary loans that we have in the pipeline to go into our balance sheet.

One of the things we had done on the proprietary loan side that those of you who are cross-pollinated and listen to the [gain calls], we are opening an office in Los Angeles to generate proprietary deal opportunities. So that will give us both coasts as well as the middle of the country and so that should expand our pipeline opportunities.

Great. Thanks for that color. And just one clarification. My quick review of the Q. it looks like as far as loans on nonaccrual, I really didn't see any change June 30 versus March 31. Is that right?

That's correct.

Okay. All right. Very good. Thanks so much.

Next question, please.

Casey Alexander from Guilford Securities.

Good morning. Do you currently have shareholder approval to sell equity below NAV?

We do. We have had it for probably three or four years now. I mean it has been a long time. We have never used it because we don't like diluting our existing shareholders. I know that sounds crazy from people who've managed based on assets under management, but we are very protective of our shareholders and there is one very large reason that occurs is because I'm the largest shareholder.

Do you still have a loan outstanding to the Company?

I do. It's been taken down to about $3 million as you'll see in the Q. We are going down every quarter.

Now, you stated that 69% -- 68.6% of the loans on the books are, for lack of a better term, originated by you and the rest are broadly syndicated that were bought in the market place. And the entire portfolio is fair valued at 79% of cost.

If we look at that 69% that was originated by your Company, what percentage of costs are --? Is that 69% markdown?

I'm sorry, I don't have it, but we will get that and post it on our website.

Okay. Thank you.

Next question.

(Operator Instructions). We do have a follow-up question from Troy Ward with Stifel Nicolaus.

I had one more. You talked about the amount of percentage of floors and such you had. Can you remind us what the average, kind of what the average floor is on the assets that have a floor?

Troy, it's generally between 3% and 5%.

Okay. That's really high. All right. So basically rates have to move a considerable amount before you are going to get a pickup and yield on those assets?

That's true.

And we look at that, obviously, in regard to whether there is a hedge that we ought to be taking a look at or an opportunity to change that. But we have not decided to do that today. We have decided that sort of taking the pain and agony of watching rates go down and hit their floors and so we will bear through it.

Great. Wonderful. All right, thanks guys.

Other questions?

[Lee Carter], a private investor.

Chip, my question is there some news out that Zacks said you might liquidate the custody, or there was a negative comment. (laughter). Have you made any comments on that?

I don't. I'm not even going to begin to comment on that. I mean we have no intention of liquidating the portfolio. And as you know, Lee, we are constantly going to know people who like to spread rumors in an effort to try to massage the stock their direction and next thing you know we will have an article out of Bangladesh as well. So we tend to --. There's not much we can do about it, but no, we have no intention of liquidating the business.

Yes I don't know where those rumors come from, but it is amazing how they get into the market place just at a time when short interest is very high in the stock.

Very interesting. Okay. Thank you.

Jeff Rudner with UBS.

Good morning. This might be more of a question for Chip. You mentioned in your comments are it that a fair percentage of the loans outstanding were floating rate as opposed to fixed.

Yes.

Okay. Do you know -- can you comment as to what percentage they are?

Hold on one second, I will get back to that. Hold on.

All right, let me ask David a question in the interim. Until fairly recently, I think most analysts expected interest rates to pick up sooner rather than later. Now we have a situation where with the weak economy that interest rates are probably going to stay where they are, conceivably even through 2012.

David, do you subscribe to the fact that interest rates are not likely to rise as soon as you might have thought three or six months ago?

I think that is true and it is true because the United States government is holding down rates, and as a result your short-term rates are artificially low, especially LIBOR and prime. I think you are going to see something over the next year. Maybe I'm just a fool to believe this, but I think you're going to see long-term rates continue to go up.

Okay, because then the last question would be if you perceive or think that rates might not go up as quickly as you previously thought, might that might lean you in the direction of making more fixed rate loans going forward as opposed to variable loans?

Yes, we do. We look at that every time we price a transaction and sometimes the small business concern wants a fixed rate and we negotiate a fixed rate. And sometimes they are willing to accept a variable rate with a floor and sometimes they try to negotiate a ceiling. I think we still have a few that have some very high ceilings on them.

And again it goes back to those of you who remember in the 1981, 1982 period in which prime rate, which was the veritable rate that most people used at the time, was around 18%. And we were lending at 5% over prime. So you are talking about an excess of 20% people were trying to pay. Of course they can't pay that, so you might as well have a ceiling on it to stop it at some place. Because in essence, you can't expect any business to be paying 20% or 30% kind of rates.

But we are doing some fixed rates. We have some fixed rates in the portfolio. Not a lot.

Okay, and then, just one follow-up question to something you said earlier, David. You think by this month or possibly September, you might be able to make an announcement about a longer term borrowing arrangement?

That's our goal, is to have something out with regard to long-term capital at that point in time. Yes.

Okay and you feel pretty confident that something will be arranged over the next, say, one to three months?

That's my goal. I need to get long-term debt into this Company or a long-term capital of some kind. So that is what we have been working on for the last -- for most of the summer.

Right. Okay. Terrific. Thank you.

Let me answer your first question which is I think we got it in the filing, but about 86% of our loans are floating rate loans that have floors. Another 6% are floating rate loans that have no floors and the remainder of the portfolio are fixed rate loans.

Okay. Thank you, Chip.

Another comment would be that if you looked at newly structured deals given where LIBOR is today that I would say the average LIBOR rate in the proprietary deal is closer to 2%. So you have got some portion where you are not going to recruit that as LIBOR rises, but it's certainly -- the current market is not 3% to 5% anymore.

Thank you.

Any other questions, please?

(Operator Instructions).

All right, if there are no further questions, we will end this conversation and thank you all for tuning in and we'll see you next quarter.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.