Gladstone Capital Corp (GLAD) 2011 Q4 法說會逐字稿

Good morning and welcome to the Gladstone Capital Corporation's fourth-quarter, year ended September 30, 2011 conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note that this event is being recorded. I now would like to turn our conference over to David Gladstone. Mr. Gladstone, please go ahead.

Thank you Keith. Hello out there, all of you. Good morning, this is David Gladstone, Chairman, and this is the quarterly conference call for shareholders and analysts of Gladstone Capital, trading symbol, GLAD. Thank you all for calling in. We always love these moments and are happy to talk to shareholders about the Company, and I wish we would do it more often, but once a quarter is the thing that we do. We hope you'll take the opportunity to visit our website, gladstonecapital.com, where you can find and sign up for email notices, you can receive information in a timely fashion about your Company. Please remember that if you're in the Washington DC area and you have a little extra time, you have an open invitation to come by here in McLean, Virginia. Stop by and say hello. You'll see some of the finest people in the business.

And now I need to read the 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 that are expressed or implied by these forward-looking statements, including those factors listed under the caption, quote, risk factors, end quote, in our 10-K and 10-Q filings, and in our prospectus as filed with the Securities and Exchange Commission. All those can be found on our website, as well as the SEC website. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

As we always do, we'll start off with our President, Chip Stelljes. Chip is also the Chief Investment Officer of all the Gladstone companies and he'll cover a lot of ground. So, Chip, go ahead.

Good morning. We closed two new investments during the quarter totalling $9.9 million and we invested $7.7 million in existing portfolio companies in the form of additional investments or draws on revolver facilities. Also during the quarter we received repayments of approximately $6 million due to normal amortization and paydowns of revolvers. So in total, we had a net production increase in our portfolio, approximately $11.6 million for the quarter, and we started the net increase in production from operating income and draws on our credit facility.

For the fiscal year ended September 30, 2011, we invested $136 million, and have repayments of $46 million for a total net production of $90 million, compared to a total net contraction of $59 million last year. But we're pleased we were able to make many new good investments this year. Since the end of the quarter, we invested $3.6 million in existing portfolio companies and we received $3.9 million in repayments, this primarily, again, from scheduled principal amortization. Included in these numbers was an investment of $1.5 million to a new portfolio company in relation to a workout of a non-approval investment that we'll talk about in a few minutes.

Also, after the quarter end, we sold $1.4 million term preferred shares, and received $33 million in net proceeds. By completing this term preferred offering, we were able to pay down $33 million on our credit facility. We're encouraged by this capital raise. We look forward to using the capital to make new investments over the next six months. At the time of this call, we owe $64 million on our line of credit and since that line is $137 million in capacity, we've got liquidity to make new investments.

We continue to see attractive investment opportunities, although there seems to be a good deal of capital coming into the market for the right deals. We're actively searching for new investments and believe we will close some in the next quarter or two. At the end of the September quarter, our investment portfolio was valued at approximately $303 million versus a cost basis of $383 million, or approximately 79% of cost. At the end of the quarter, we had loans with eight companies on nonaccrual, including two new ones added during the current quarter, [Nual] Holdings and Access Television. Of the eight, we've taken operating control of over 50% of these companies as of September 30, and we're working hard to fix the problem and improve profitability.

Of the investments classified as non-accruing have a cost basis of $41.1 million or about 10.8% of the cost basis of all investments in our portfolio at fiscal year end. From a fair value perspective, the non-accruals fair value represent $5.3 million, or about 1.7% of the fair value basis for all investments in portfolio at fiscal year end. We sold the assets of one of our non-accruing loans, KMBQ to Ohana Media after fiscal year end. Ohana will replace KMBQ on our schedule of investments and Ohana is now a performing loan, reducing the number of investments on nonaccrual to seven.

We continue to have a high concentration of variable rate loans so that we should have higher income when rates begin to increase. And while our rates are variable, they usually have a minimum rate or a floor, so that declining rates are mitigated. Approximately 86% of our loans have floors. However, even with a high percentage of floating rate loans, having floors with short-term rates, floating rates remaining at all-time lows, we're still generating less income than in the past. 6.3% of our loans do not have floors or ceilings and the remaining 7.7% of our loans have relatively high 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 70% of our investments at fair value, so a weighted average rating of 5.9 as of fiscal year-end, which remains unchanged from our prior fiscal year end. As for our rate and syndicated loans, which make up 23.7% of our portfolio at fair value, they had a weighted average rating of B and B2 for the year end, down slightly from a B plus, B2 at our prior fiscal year end. Our unrelated syndicated loans represented 6.3% of our portfolio at fair value and had a weighted average rating of 5, down from 7 from our prior fiscal year end.

The quality of our income continues to be good. As we've discussed before, we try to limit 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. This type of non-cash income is subject to our 90% payout requirement, so we would be paying out cash that we've not yet received.

The senior and second-lien debt marketplace for our larger middle-market companies continues to improve, albeit inconsistently. Our new investments this year came primarily from these larger middle-market companies and were reflected in our cost basis of senior and second lien syndicated loans of (technical difficulty) at September 30, 2011, up from $18 million at the end of last fiscal year. We believe there are many attractive investments in this space, coupled with decent liquidity.

Market for loans to companies at the lower end of the middle market, which we typically invest most of our capital is seeing more competition. But not from banks. Most banks continue a policy to tighten credit standards, especially for companies at the lower end of the middle market. Many banks are making purely asset-based loans, so we're seeing an increase in non-bank lending sources. Competition comes from other public funds like ours and many small private funds as well. Net of all these conditions, we still feel we have a good market opportunity. Our loan request pipeline is still full and we should be able to show you some good investments over the next several quarters. And with that, I'll turn the presentation back to Dave.

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

Good morning, everyone. I'll go over the financials starting with the balance sheet. As of September 30, we had approximately $318 million in total assets, consisting of $303 million in investments at fair value, and 15 million in cash and other assets. Our borrowings outstanding totaled $99.4 million on our line of credit and we had approximately $214 million in net assets, as of the 2011 fiscal year end. Therefore, we are less than one-to-one leveraged. This is a conservative balance sheet for a finance company, which are usually leveraged much higher and we believe that our overall risk profile is low.

At the time of this call, we only have $64 million borrowed on our $137 million line of credit so we have the ability to deploy more capital for the right opportunities. Moving over to the income statement, for the September quarter, net investment income was approximately $4.8 million versus $4.4 million for the same quarter last year, an increase of 8.7%. The increase was primarily due to an increase in interest income, resulting from 20 net new investments since September 30, 2010. On a per common share basis, net investment income for the current quarter was $0.23 per share compared to $0.21 per share for the fourth quarter ended September 30, 2010. For the fiscal year ended September 30, 2011, net investment income was $18.4 million, or $0.88 per share, as compared to $17.8 million, or $0.84 per share for the prior year, an increase in net investment income of 3.7%.

Net investment income increased primarily due to decreased interest expenses, resulting from decreased borrowing costs under our credit facility. The effective interest rate was 6% for the fiscal year ended September 30, 2011 as compared to 7% for the prior year, which is due in part to the November 2010 amendment to our credit facility, which eliminated the minimum earnings shortfall fee. In addition, professional fees decreased by $1 million due to increased legal fees during 2010, from restructures for certain troubled portfolio investments. These decreases in operating expenses were partially offset by the increase in incentive fees during the 2011 fiscal year, which is due to the increased pre-incentive fee net investment income. 100% of distributions paid from fiscal year ended September 30, 2011 are covered by taxable income. I think this highlights our commitment to prudent growth.

Overall, while interest income on our portfolio investments remained consistent year over year at $32.6 million, it generally trended down throughout fiscal year 2010 compared to generally trending up throughout fiscal year 2011, with our largest quarter coming in the fourth quarter of 2011. These trends primarily resulted from our increased investment activity during 2011. In 2010, repayments outpaced origination activity, resulting in the overall reduction in the size of the portfolio. In 2011, we had an overall net increase from the size of the investment portfolio from investment activity. We believe this trend is a good indicator for the fiscal year ending September 2012.

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 come 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 September 2011 quarter end, there was a net realized loss of $1.3 million, which primarily resulted from our restructuring of one of the portfolio companies, SCI cable. There was no realized activity during the prior year fourth quarter.

For the year ended September 30, 2011 where we recorded a net realized loss on investments of $1.3 million, which resulted from the aforementioned restructure of SCI Cable. For the year ended September 30, 2010, where we recorded a net realized loss on investments of $2.9 million, which consisted of $4.3 million of lawsuits from the sale of several syndicate loans [Goldtel], Kinetic, Wesco, and the write-off of Western Directories and the payoff of CCS. And this was partially offset by $1.4 million gain from the Ace Expediters payoff. From an unrealized standpoint, for the September 2011 quarter end, we had net unrealized appreciation of $4 million over our entire portfolio. The decrease was primarily due to depreciation on certain of the Company's proprietary investments, most significantly, Sunshine Media and Viapack, primarily due to decreased portfolio company performance, and comparable multiples. This was offset by appreciation in Defiance Integrated Technologies, investment due to increased company portfolio performance and related comparable multiples.

For the year ended September 30, 2011, we had net unrealized depreciation of $38.8 million. The largest driver of our net unrealized depreciation for the year was the depreciation in each of Sunshine Media Holdings, $21.2 million, and Newhall Holdings, $9.3 million. And again, these were primarily due to portfolio company performance and the decrease in certain comparable multiples. These depreciations were partially offset by an appreciation in Defiance, $6 million for the year, which resulted from an improvement in portfolio company performance and in certain comparable multiples. Net unrealized appreciation of $2.6 million was recorded in the prior fiscal year and that was primarily due to the reversal of previously recorded unrealized depreciation on exited investments.

Our entire portfolio was fair valued at 79% of costs as of September 30, 2011. The cumulative unrealized depreciation of our investments does not have an 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 that could ultimately reduce our distributions. So our bottom line has been net decrease, increase and net assets resulting from operations. This term is a combination of net investment income, unrealized net appreciation or depreciation and realized gains and losses.

For the September 2011 quarter end, this number was a decrease of $0.5 million, or $0.03 per share versus an increase of $3.8 million, or $0.18 per share in the prior-year September quarter. The year over year change is primarily due to the $4 million in unrealized appreciation and investments in the current quarter compared to $1.2 million in unrealized depreciation recorded in the prior year quarter. For the September 2011 year end, this number was a decrease of $21.1 million, or $1.00 per share versus an increase of $16.4 million, or $0.78 per share in the prior year. The year over year change is primarily due to the $38.8 million in unrealized depreciation investments in the current year, when compared to $2.3 million in unrealized appreciation recorded in the prior year.

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. If you look back over our history, generally, we have companies that have problems from time to time and then we have to stop accruing income. After a while, we fix the problem and get all or most of our money back. And this is one of the strengths that we have in our operating team here at Gladstone, so we can fix many problem companies. And now, I'll turn the program back over to David.

Thank you, David Watson, and that was a very good presentation. I hope all our listeners out there will read our press release, study our year-end reports, that's called the 10-K, which we filed with the SEC yesterday. You can access the press releases and the 10-Ks and 10-Qs on our website at www.gladstonecapital.com and you can also find them on the SEC website, at www.SEC.gov.

I think the big news this quarter is a continuation to make progress with our portfolio of companies. They are getting stronger as the economy gets better. So we continue to work them out and make them better for everybody. Also this quarter, we see our backlog of opportunities to lend money increasing, and I think that will continue. I don't see any slowdown coming in that area. Also, we added a lot of new investments in our portfolio of loans during the year, about $136 million, and that will help us make more money for the shareholders.

It has been in, my estimation, a very sluggish three years, but I think we've finally come around and things will be better over the next three years. But I want to remind everybody that our biggest challenge today is the long-term debt marketplace for our Company. We have a line of credit with very supportive lenders. Those institutions seem to be behind us. The line of credit is working fine, and we believe it's sufficient for our near-term needs. But it is a short-term line of credit, and we are near to signing a commitment with the lenders and I hope we can, at our next call in the quarter, we can have that closed and out to you. But at this point in time, I can just say that we're moving forward with that.

But at the end of the day, we have to find long-term funding solutions for our Company. In order to make a lot of long-term investments, we need to raise long-term debt and long-term capital, such as the issuance of our preferred stock that we issued just last month. We found some long-term money with a new preferred, but that's just part of it. We need more than just the $35 million that we sold in net offering. Our investments are long-term, so we need long-term liabilities to match those durations. We shouldn't rely on short-term lines of credit for our Company.

So we're talking with some insurance companies, but we're still not there yet. The insurance industry still doesn't seem to be financing small companies like ours, and certainly not finance-oriented companies like ours. And this lack of long-term debt and long-term equity can stunt the growth, or if we can find it, it will accelerate our growth. And that's our challenge in the near term.

Our portfolio of companies, we certainly are worried they are not going to be able to find long-term senior loans that they need. There's a fair number of regional banks that are making some loans based primarily on assets. These asset-based lenders are plentiful today, but they're all short-term lenders and they're still not making or extending long-term loans to our portfolio companies. Every now and then, we find a bank that will, but it's not plentiful. I think the banks will get better over time, especially as the government begins to stop beating them up so much in their audits.

We do have our worries, and I mention them each time. I'll just run through them now. We worry about oil prices. Oil is on the way up. The only thing that would reduce oil prices is if there was a recession. We are worried about inflation. Decisions by congress and the President to expand the money supply will ultimately cost more inflation and more problems. And the spending by the federal government is still really off the charts and we look for the so-called stimulus packages and what they are doing and they're really spending goodies for many of the supporters of the legislatures.

And government is borrowing today $0.43 of every $1.00 that they spend, and next year it may be as much as 50%. We can't keep going like that and something has to change and hopefully it will happen soon. The amount of money being spent on the war in Iraq and Afghanistan certainly hurts the economy. We support all of our troops over there. They are the great heroes of this period in history, and we wish them a safe return home and certainly the close down of the Iraq and the Afghanistan war.

And of course, the government is talking about raising taxes again. I don't know how much the economy can stand in more taxes, but we all know that we have a spending problem and not a tax problem today. In addition, the trade deficit with China, certainly China's just one of those nations that continues to subsidize their industries to the disadvantage of our businesses here that aren't subsidized. They subsidize oil prices significantly, by about 50%. And that means that our companies have a hard time competing with them and that means jobs leave the United States and go to Asia.

The downturn in housing has been a real drag on the economy. It's been a disaster obviously for mortgage holders, as well as those who have mortgages that are now under water. No one knows how many home mortgages will ultimately fail, but the estimates are in the trillions of dollars. I think that's the main cause of the recession today, and just glad that we weren't investors in anything in the housing industry. We see the problems in Europe, in countries like Greece and Italy, and that may hurt some of the companies, but we don't really have any investments in Europe or any of those countries, or Asia, for that matter.

So US companies -- our US companies have little contact with Europe or any of those problem areas, so we don't really worry about the European problem that much because we don't see it hurting our business. Obviously, we didn't have any investments in the housing industry, but when that blew up, obviously, it hurt everybody and hurt us as well. So we're wishing the Europeans well on getting their problems fixed. In spite of all of those negatives, a lot of the small industrial base that we invest in, in the US today is really not a disaster. There's the lingering recession that continues to have an impact on all of the companies, including our portfolio companies. But it's not a disaster today as it was two years ago.

But like most companies, some of our portfolio companies have not seen increases in revenues or backlogs. They continue to grow, but very slow. We have others that are seeing incredible increases and it's just a mixed bag out there. It's very uneven recovery in the economy today. We believe the downturn that began in 2008 is on bottom. I don't know how long it will take to go up, but it may be a very slow climb out of this. We've been in it about three years now and no one believed it was going to last that long.

Anyway, we're continuing to do our distributions to common shareholders, $0.07 per share, each of the months of October, November, December, as you know. The board will meet in January to consider the vote for January, February, March. I see no problems with those being declared. And the distribution rate on the common stock today, with a common stock price at about $8.36 as it was yesterday, that's better, a little better than a 10% yield, so quite attractive stock. As some of you note from my filings, I bought some more shares and the distribution of 7.125% is on our recently issued term preferred stock, and that's about $0.1484 cents a month, or $1.78 annually.

And the first distributions will really be coming to everyone in December 2011. The term preferred stock had a closing market price yesterday of $25.19, so up $0.19 from the prior period. And I apologize for the look-up on this. New York Stock Exchange, if you go to that www.NYSE.com and you put in GLADPRA, you can get a quote. If you're on Nasdaq, you have to put in GLAD.PRA. I don't know why they are different, but they are. And even worse, if you're on Yahoo, you have to put in GLAD with a dash P in order to get the quote. And I can't find it on some of the other sites that I have, such as the Wall Street Journal. So I apologize for that. I'm sure it will work its way out and be a little more consistent as time goes on.

Please go to our website at www.gladstonecapital.com. Sign up for our e-mail notifications. We don't send out any junk mail, just news about your Company. You can now find us on Facebook, if you want to follow us there. It's called The Gladstone Companies. You can follow us on twitter, under Gladstone COMPS.

In summary, I think we had a reasonably good year last year. We expanded the portfolio by $90 million net, new earning assets on the books. I think we're moving forward at a good pace, and with our new equity from the preferred offering, we should have progress again in this fiscal year that will end in September of 2012.

Folks, as far as I can see, the economic conditions are looking like they are changing for the better. I think the economy has bottomed out. We're starting to gain strength. I know there's a lot of strength in some of the middle-market companies. I think the next two quarters will be good ones for us. I think it will be telling for the economy, but we are stewards of your money and we stay the course and continue to be conservative on our investment approach and I hope that's good for everybody. Operator, if you'll come on now, let's open up the lines to the analysts and shareholders who want to ask us some questions.

(Operator Instructions) Troy Ward, Stifel Nicolaus.

Hey, David, you talked about you felt like you've really turned the corner, it feels like the worst is behind you. As we look at the portfolio, again, you had this quarter, you had two additional companies go on nonaccrual, and as we look at it, if you exclude the $90 million-plus dollars of syndicated loans, you have about $290 million of self-originated assets. Of those,14% are on nonaccrual and almost16% are marked less than $0.50 on the dollar. That's 30% of the portfolio that your team has underwritten. Are you showing some pretty extreme levels of stress? How should we think about the underwriting process at Gladstone? Has anything changed to make us think the credit quality should be better going forward? And what can you do to quite honestly retrieve some of the value in this portfolio?

Well, I can only point to the past, and we've had very few losses over the years. If you go back and look at the losses, yes, we put companies in nonaccrual maybe faster than some others. We certainly don't do what others have done, which is convert all the debt to equity in order to make their numbers look good. We leave them in debt position so that we can work on them, and continue to work and get them fixed. As you know, Chip mentioned that we have the one that came off nonaccrual as we fixed it.

I think most of the problems we have had in our portfolio have come out of the broadcast area, which are dependent on advertising. Advertising has had a much slower comeback than other parts of the economy. And so as a result, those have performed poorly. There are others in the portfolio that have performed very well. I think you'll see over the next year, some of those companies that we've taken over and fixed are actually going to get sold or will be put up for sale. You'll see some tremendous capital gains from that portfolio as well.

So you have to remember that we did go through the worst recession we've ever seen and I know we are compared to some of the other BDCs out there that had very small portfolios before the recession and have now made hay in the good times of the recession bottoming out, and more power to them. We are in favor of everybody making money. But I think you'll see that the newer transactions that we have will continue to grow and those that have gone through the recession and that we've taken over, we've fixed. And, Chip, you have a couple of deals that we have taken over and that we're now in the position to sell. Do you want to comment on those?

Yes, not specifically, but there are at least two companies in the portfolio that we took over during the downturn, both of which we're going to make, in my opinion, substantially more money on those deals than we would have made if they'd met their original business plan and we'd just been mezzanine holder of them. You see some of that in the valuations.

I'd also just note on valuations, valuations for us are primarily where we're looking. Where you might see a large valuation of portfolio company, we may look at it and say that's the history, but we know what the current plan is and we're comfortable with the management team. We use S&P and S&P tends to look backwards at trailing 12 months of performance. And we have to look, as stewards of the money, we have to look at forward performance and plans and what the Company's trying to achieve. We're working hard on the ones that have had issues.

Great. That's good color. Thanks, guys. David, Chip, the one you mentioned that came off nonaccrual, was that the KMBQ?

That is it.

Will you end up with a positive IRR on that transaction?

I don't know. We're -- we've got first of all, to get them paying interest, which is the first order of business. And then see if we can get them to pay off the loan. But I suspect it will be positive once you do that.

Okay, great. And then one last one, sticking with the credit quality. Obviously Sunshine Media is -- and had you some commentary in your prepared remarks. It's still a sizable investment. It's still on accruing status. Can you give us a little more color of what's going on there? It's marked at $0.30 or close to $0.30 on the dollar. Are you still receiving current interest on it and do you anticipate this going on nonaccrual?

We are getting current interest on Sunshine. Sunshine remains a work in progress. We have -- as we've mentioned in past calls, this company is being repositioned with a media company, subject to the advertising-type revenues that David talked about. Got a very strong management team in here. We've taken out the control equity investor in the deal. I'll tell you just, without being too specific about portfolio companies, this company has low profitability, but is doing a lot of right things to improve the business and almost all of the capital that we've committed to Sunshine is for new initiatives that will build the business. It's not eating operating cash. It's just got a good bit of leverage, thus the valuation. We have some confidence that the right things are being done there.

Great. One for David Watson. Just a quick modeling question. What's in that other expense line item? It's grown over the last couple years, from about $270,000 to $800,000 and this year it's up around $1.2 million. How should we look at that? What's in it, first of all and how should we look at it going forward? It's not super material, but it will be a couple -- if this increase continues, it will be a couple cents to the model.

The other expense, the $1.2 million for the fiscal year ended 2011, Troy?

Yes, that's the line item.

Okay. So that's actually down a little bit from last year, where it was at $1.3 million.

Oh, I'm sorry. I had it in my model at $800,000. Maybe I had backed something out as I considered it one-time. What do you think about that line item going forward? Do you think it will stay relatively flat in that range?

I believe so, Troy.

Okay, great. Thanks, guys.

Thank you.

Next question, please?

Jeff Rudner, UBS.

Good morning, David, good morning, guys. David, stepping back a little bit, looking at the dividend and the comments made, and obviously the net investment income being at $0.23 for the quarter, which amply covered the $0.21 dividend. When you cut the dividend back in 2009 from $0.14 a month, $0.07 a month, obviously everybody understood what the necessity was for that. Now that things seem to be improving and the net investment income for the first quarter now should be even a little bit above the $0.23, do you anticipate the possibility of raising the dividend, albeit gradually as we go through 2012?

That's the -- Jeff, that is the question that everybody asks. And the answer, of course, is always the same. We're going to raise it as fast as we possibly can based on earnings. Right now, earnings are dependent on new transactions being put on the books, new portfolio companies, of course. And that's an unknown that we just never know how to model into our models of how much we're going be able to put on the books each quarter. As the largest shareholder, I can assure you that I want to increase the dividend as much as I possibly can. So we're working towards that. Whether that means we might be able to do it in this fiscal year, I'm hopeful.

Okay, thank you.

Next question?

(Operator Instructions) JT Rogers, Janney Montgomery Scott.

Good morning, everyone. I had a quick question. You all referenced problems in the media portfolio. I was wondering if you could comment about maybe trends that you're seeing in advertising spending in some of the smaller markets that you all invest in. (multiple speakers)

Yes, the media marketplace has been one of the areas that was damaged the greatest. While we didn't invest in the housing industry, many of the advertisements on both radio and magazines have been related to the housing industry, so we took our licks from that portfolio -- in that part of the portfolio from a different way of looking at it. Also, much of the media portfolio was tied to automobile advertising and the dealers. And of course, that went through the ringer as well. You got two of the biggest advertisers in the business, which is automobiles, and that just destroyed the media area all together.

Some of the smaller marketplaces are coming back now. The automobile people are back full force. If you watch the TV -- you see every other ad seems to be an automobile ad. And the same thing is happening with the smaller marketplaces. They are now coming back. The media advertisement for automobiles in the newspapers and the magazines, I think is still low and it's been replaced somewhat by some of the media advertisements from the medical profession and the legal profession, but it's still not strong. So what we've seen in things like our yellow page directories is, yes, it's coming back, but it's very slow and people are reticent to spend money at this point in time, still today. It's just a slowness.

Nothing out there, JT, that I can point to that says there's going to be a quick turnaround in advertising and yellow books and magazines and radios are going to flourish again. It's helped a lot that we have a political campaign right now for the presidency, as well as congressmen and senators. That will be on radio, TV, billboards. We have billboards, as you know. So all of those have had impact, and I think this year that we're in -- this election year that we're coming into is going to be a good one for most of the media portfolio. But it's still not where it was before the recession. And it's one of the areas that we worry about, but not much you can do other than continue to work hard and put things together.

Thanks, David, that's helpful. And just one other question. You all have been very shareholder friendly with the credit to base -- to your incentive and base management fees. With you all now out-earning the dividend, I was wondering if you were reconsidering or considering changing your policy in terms of the credit to base management fee.

We haven't gone through that. We go through it once a year in real detail with our Board of Directors and we did it in June, actually in July, the July board meeting. So we didn't make any changes then. But we always look at it and right now, it's not on the agenda.

Okay. Well, thanks a lot.

Next question, please?

Troy Ward, Stifel Nicolaus.

Hey, David, real quick, can you just give us again, as we think of the overall funding in the portfolio with the $92 million syndicated portfolio, I'm having a little trouble understanding the real value of that portfolio for shareholders. I mean, as we saw in the last downturn, that provides liquidity until times get tough. And then the liquidity's not there. You had to sell out of that portfolio last time at a loss. What is the rationale for holding $90 million of syndicated loans?

As you just mentioned the important thing, liquidity. First of all, you say it's not liquid, but it really is. Our proprietary portfolio is absolutely illiquid. There's no way to sell that stuff, whereas we sold it actually at a 10% premium to where it was valued at. But nonetheless, it provided a way for us to pay off the banks in real trouble times.

I know it's not something everybody thinks about every day, but I do, and that is matching the book. And so I like to match the book with something that I know I can work with and if, God forbid, KeyBanc was bought by Deutsche Bank and we needed to get out of that situation, we would have the ability to do that pretty easily, even though we might take a hit in terms of the downstroke, in terms of the valuation and what we might get for that syndicated loan portfolio. But it does provide us with the opportunity to liquidate that. And my goal is to build up the right-hand side of the balance sheet with long-term debt and long-term equity, as opposed to revolving lines of credit.

And we are very thankful for our line of credit, but we know that things can change there overnight. You could have the government put all of these loans to BDCs on some kind of watch list, as they have done a few of the BDC's -- and we're not on anybody's watch list that I know of, and at this point in time, I think we'll stay off of it because of the way we structured our loan. But if you talk to some of the lenders, they worry that the government might put these on credit watch of some kind. And so as a result, make them put a lot more equity on it.

With the syndicated loans, it helps with us our banks. They understand syndicated loans. They have some in their own portfolio, so it makes us easier to work with. And if you noticed, a couple of the BDCs out there do nothing but syndicated loans and they position themselves that way. All of the above are the reason we're in syndicated loans. Would I like to be 100% in proprietary loans? The answer is yes. I think we get much more bang for our buck there, but at the end of the day, I'm going to keep a good slug of syndicated loans just for liquidity purposes.

Great, thank you, David.

Other questions?

(Operator Instructions) Dixon Braden, Morgan Keegan.

Hi, good morning, gentlemen. I was just a little curious if you could walk me through the rationale behind your preferred offering. Seemed kind of small, a little bit expensive. Were you not able to expand that credit facility? Or were you in negotiations to expand the facility? Just a little color there would be helpful.

All right. The existing facility is being worked on now. I think we'll have a term sheet soon. And I think the closing will happen maybe this quarter, but probably most likely next quarter. So we'll end up with a transaction, I think will be very similar to the one that we have in Gladstone Investment, because two of the lenders are the same and one of them is the lead with this Gladstone Capital. No guarantees, of course, but that's what I believe will happen. And we're getting indications that that's what's going to happen.

The problem with the line of credit even though it may turn out to be a two- or three-year line of credit is that it's just that -- it's short-term, and what we need is long-term. The only long-term that we came across that we could issue was the preferred stock. Our common stock has been beaten down to such a low rate that issue-in-common had a 10% yield plus some kind of discount for the market would have been astronomically high capital. We've seen some of the BDCs issue that kind of common stock and they end up having to cut their dividend, and while that may be good for them and their long-term outlook, we don't take cutting the dividend as something that we could do for our shareholders.

So as a result, we run the Company with the idea that we search for the cheapest, long-term capital we can find. We had engaged several underwriters to work on some debt side for us. We were not able to find any long-term debt that made sense for us. Yes, we found long-term debt. It was very expensive, even more expensive than the preferred. Actually, the preferred, if you compare it to other preferreds that have been done in this period of this time, a 7.125% rate of return was exceedingly cheap compared to what we were told, term preferred, or what others have paid in the 8 handle, some even 9.

We've avoided the expensive capital in order to generate long-term capital and five years doesn't seem like that long, but it is in the marketplace today. A five-year term, that would give us a chance to build up the portfolio. It will be, I think at the rate we're doing transactions at today, it should be very accretive to the common shareholders. It should move the earnings per share up over time. And as a result, will put some pressure on our Board to declare either an extra dividend or increase the common dividend. At this point in time, it was the best we could find out there and we are very grateful to the underwriters who made that road show happen for us.

Okay, great. Just one quick question, if I can on your deployment trends. In 2012, you said you were pretty comfortable with what you're observing right now in the marketplace. You say you're looking for about what, $140 million next year or something. Would that be fair?

I wish I could tell you. (laughter) The problem with that, of course, is that we have a great pipeline. It is very strong and robust today. We have a good feel for the marketplace. There is competition. Your friends that you work with in the BDC community are competing with us. We see one or two of them from time to time. It does seem to be a very large marketplace today, with plenty of room for us to put loans on the books. It's just a matter of -- in a competitive environment, are we willing to go at a lower rate and take the risk profile? And sometimes we balk at that and others take with it and go with it, and God bless them, I hope they win. But saying $140 million is the number would be very hard for me to say.

Sure.

I'm sorry, I can't do better than that.

No problem. Thank you very much for taking my questions.

Okay. Next question?

Mark Hughes, Lafayette Investments.

Just a follow-up on the credit quality issue. Given the size of the accumulated net realized losses, as well as the cumulative net unrealized depreciation on the investments, you're not making loans to IBM and AAA credits or any AA credits. We realize many of your companies will get in trouble periodically. But I am a little bit surprised at the magnitude of the losses of realized and unrealized when companies are getting in trouble and maybe some of this unrealized depreciation does come back. But could you talk a little bit about how you protect yourself when a company gets in trouble and are there ways you can do this better so that, maybe the loss is $0.20 on the dollar instead of $0.70, $0.80, or $0.90 on the dollar? How do you go about protecting yourself so that the hit isn't so extensive when a company gets in trouble?

Well, Mark, it's a good question. And at the end of the day it depends on the ability of the company to generate cashflow. When hard times come, especially companies that are in the media business or in the service business can get hammered pretty hard, as well as the manufacturers, for that matter. But we do have a security interest in the assets. Sometimes it is a second behind the bank that's providing a revolving line of credit, and in some cases, it's a first on the line of credit. When we do these transactions, we look for the amount of equity that's already in the company, as well as what might be contributed by someone else, such as a buyout fund. And usually there's a substantial amount of equity in the buyout being placed into the company.

In one of the companies that I think that I think Chip mentioned, he has a situation in which he took over the company in which the buyout firm had put some 30% of the purchase price in equity and they lost it all. We have turned those companies, two of them around, in which the equity was lost, and we have turned those around now and hopefully we will list them for sale this year and recover all of our income, as well as all of our debt that we are owed on those. At the end of the day, there is no good way to salvage a company that has an operating problem that can't be fixed. If we can fix the operating problem, sure, you can bring them back to life. Sometimes, as it did in KMBQ, it takes you two years, maybe it was even longer than that. When that one got in trouble, we kind of suffered with it for a year or so before we took it over.

But at the end of the day, it just takes a longer term, especially when you don't have a turnaround in the economy. The economy usually in these recessions is an 18-month and then you're back in a growth mode. This time, we're three years into this and still not in a growth mode. So even though you take over a company and you work it hard, you may not get it back to the position that it continues -- that it can pay you, but in the two that Chip mentioned a few minutes ago, we didn't mention their name, both of them are now paying as agreed. They are strong. They are moving forward. And at the end of the day, we'll have all of our money back, plus some capital gains to offset some of the losses.

I would remind you that over the 10 years, and I'm doing this from memory, the track record is such that we have lost, net loss of about 0.5% per year. If you match that up with our overall earnings, which tend to be, 11% would be a good number, you can see the returns then are dramatic. The problem, of course, is that most people can't wait 10 years. They don't want to look at a 10-year average. They want to know what are you going to do for me this year or what did you do for me last year. And of course the last three years have been exceedingly difficult for everybody and at that point, I would just have to say you can't protect yourself from a disaster, and this economy has been a disaster.

It's the worst I've ever seen. I lived through 1980s, I lived through the 1990s, and certainly 2001 didn't touch us very much, but it was a bad recession. And this has just been an extraordinary difficult period of time. I would remind you that depreciation -- you should look at that from the perspective of someone like Standard & Poor's who is looking at this and saying that it's worth $0.25 on the dollar or even $0.75. We had one in our other company that was valued at $0.75 on the dollar six months ago and it paid off. We got $1.00 back, plus all of our interest.

I'm not saying that Standard & Poor's is wrong in their valuations, because that wouldn't be right for me to say. I just think they are very conservative and they have to be now after their problems in the housing industry, where they were giving out fairly nice and high valuations. So we may be under a cloud from S&P being more conservative, but I think if you looked overall, if we had to liquidate the portfolio tomorrow, they wouldn't be far from wrong. And that's just because we've got some deals that are in workout. We now have seven that we have to fix. And I think you'll see some of them getting fixed in this fiscal year. And others will take a little more time. And I can't give you a better answer than that, Mark. I'm sorry.

Thank you very much.

Next question?

Actually, there are no more questions at the present time. This concludes our question-and-answer session. I would like to turn the conference back over to David Gladstone for any closing remarks.

All right. We thank all of you for your good questions and the time that we have with you, and we appreciate it. We'll see you next quarter. That's the end of this call.

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