Gladstone Capital Corp (GLAD) 2012 Q1 法說會逐字稿

Good morning and welcome to the Gladstone Capital Corporation first-quarter ended December 31, 2011, shareholders 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 this event is being recorded. I would now like to turn the conference over to Mr. David Gladstone, Chairman. Please go ahead, sir.

Thank you, Denise, for that nice introduction and those instructions. And hello and good morning to all of you out there. This is David Gladstone, Chairman, and this is the quarterly conference call to shareholders and analysts for Gladstone Capital, trading symbol GLAD.

Thanks to all of you for calling in, and we're always happy to talk to shareholders about our Company and wish there were many are more opportunities to do so.

We hope to take this opportunity -- we hope you take the opportunity to visit our website at www.GladstoneCapital.com, where you can sign up for e-mail notices and you can receive information about the -- in a timely fashion.

Please remember that if you are in the Washington DC area you have an open invitation to visit us here in McLean, Virginia. Please stop by and say hello.

Now I am going 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 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 are based on our current plans and we believe those plans to be reasonable.

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

We always start with our President, Chip Stelljes. Chip is the Chief Investment Officer of all three of the Gladstone companies and he will cover a lot of ground here. Chip, go forward please.

Good morning. This quarter, the first quarter of our fiscal year, we focused on managing our existing portfolio and renewing our revolving line of credit. We closed one new proprietary investment during the quarter totaling $1.6 million, which resulted from the sale of KMBQ, which was one of our nonperforming borrowers, to Ohana Media.

And we invested $9.7 million in the existing portfolio companies in the form of additional investments or withdraws of revolver facilities, including an additional $4.75 million to support the acquisition of a competitor by our portfolio company, NAS.

Also during the quarter we received repayments of approximately $10.8 million, primarily comprised of the early payoff at par of Northern Contours, Inc., for $6.1 million, as well as normal amortization and pay down on revolvers.

So, in total, we had a net production increase in our portfolio of approximately $0.5 million for the quarter ended December 31, 2011. And we funded the net increase in production from operating income and draws on our credit facility.

Since the end of the quarter we invested $3.1 million in investments to eight existing portfolio companies and we received $2.9 million in repayments, which mainly consisted of the early payoff at par of our investment in Global Materials Technologies. And as part of this payoff we received $1 million in success fees, which will be reflected in our quarter ended March 31, 2012.

Subsequent to quarter end we extended the maturity date on our $137 million revolving line of credit by nearly 3 years from the original maturity date of March 15, 2012 to January 18, 2015. The amended credit facility may be expanded to a maximum of $237 million through the addition of other committed lenders to the facility. The interest rate remained unchanged on the amendment at an all-in rate of [5.25%] and all other terms of the facility were substantially unchanged.

But we continue to see attractive investment opportunities, although there seems to be a good deal of capital and competition in the market for the most attractive deals. We are actively searching for new solid investments and believe our portfolio production will increase in the next quarter or two in accordance with our investment objectives.

We were very pleased we were able to raise long-term capital through our term preferred stock offering in November and to extend our credit facility for a three-year term. Combined this capital should facilitate us growing the portfolio and increasing our net investment income over the long term.

At the end of the first quarter of 2012 our investment portfolio was valued at approximately $293 million versus a base basis of $370 million or approximately 79% of cost. This fair value to cost percentage is consistent with the last quarter, which was 79% as well.

At the end of our first quarter we had six portfolio companies on nonaccrual status. We sold the asset, securing our nonperforming loan to KMBQ, as I mentioned, to Ohana Media to help finance Ohana with a note of $1.6 million. And while this triggered a realized loss of $1 million, this was $1.1 million above where it was marked at 6/30, and we converted a noninterest-bearing loan into a smaller performing loan.

In addition, our investment in Newhall Holdings was sold during the quarter generating net proceeds before escrow collections of $3.3 million, resulting in a realized loss of $7.4 million. The $3.3 million recovery was at $2.6 million above where the investment was marked at 9/30. We believe these two moves were the best result we could have achieved for two troubled portfolio companies.

Of the six companies on nonaccrual at quarter end we have operating control of five of them. And we're continuing to work to fix the problems and improve their profitability.

Investments classified as nonaccruing at a cost basis of $28.8 million or about 8% of the cost basis of all debt investments in our portfolio as of December 31, 2011.

From a fair value perspective, the nonaccruals fair value represents $3.2 million, about 1.1% of the fair value basis for all debt investments in the portfolio at quarter end.

We continue to have a high concentration of variable rate loans, so we should have higher income when rates begin to increase. And while our rates are variable, they have a minimum rate, or floor, so declining interest rates are mitigated. Approximately 87% of our loans at cost have floors, and the 6.5% of our loans do not have floors or ceilings, and the remaining 6.3% 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 remained relatively unchanged. Our risk rating system attempts to measure the probability of default for the portfolio by using a 0 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 constitute 69.5% of our investments at fair value showed a weighted average rating of 6.1 as of the quarter end, which is a slight increase from where it was at September 30, 2011.

As for our rated syndicated loans, which make up 18% of our portfolio at fair value they had a weighted average rating of B, B2 for the quarter end, which remained unchanged from the fiscal year-end.

Our unrated syndicated loans represented 12.5% of our portfolio at fair value, and had a weighted average risk rating of 4.9, down slightly from 5.0 at our fiscal year-end.

The quality of our income continues to be good. As we discussed before, we 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 for tax, but is generally not received until much later and sometimes not at all. This type of non-cash income is subject to our 90% payout requirement, so we would be paying out cash we have not yet received. We had no PIK income during the first fiscal quarter of 2012.

As for the marketplace, the senior and second lien debt marketplace for larger and middle-market companies continues to improve, albeit inconsistently. At times we believe there are attractive investments in this space coupled with decent liquidity.

The market for loans to companies at the low end of the middle-market, in which we invest most of our capital, has seen more competition, but not really from banks. Most banks continue a policy of tightened credit standards, especially for companies at the lower end of the middle-market. Currently many banks are making purely asset-based loans, although we are seeing an increase in non-bank lending sources.

Competition comes from other public funds like ours and many small private funds. Net of all this we still feel we have a good market opportunity. And the loan request pipeline is good, better than it was at the end of last quarter. We hope to show you some quality investments over the next several quarters.

And, with that, I will turn the presentation back to David.

Chip, that was a 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 go over the financials, starting with the balance sheet. As of December 31, the first quarter of our fiscal year, we had $308 million in total assets, consisting of $293 million in investments at fair value and $15 million in cash and other assets.

Our borrowings totaled $56.9 million at cost on our line of credit. In addition, during the first quarter of 2012 we completed a public offering of 1.5 million shares of our 7.125% Series 2016 term preferred stock at a price of $25 per share, resulting in gross proceeds of $38.5 million.

We used the net proceeds of $36.4 million from the offering to repay a portion of that pending balance on our line of credit. Due to its mandatory redemption feature, we have classified the preferred stock as a liability on our balance sheet as of December 31, 2011.

Related to this offering we incurred $2.1 million in deferred offering costs during the first quarter, which we recorded as an asset on our balance sheet and will amortize over the redemption period ending December 31, 2016.

For the quarter ended December 31, 2011, we had approximately $208 million in net assets or $9.90 per share. Therefore, we continue to be less than 1 to 1 leveraged. This is a safe balance sheet for a finance company, which are usually levered much higher. We believe that our overall risk profile is low.

At the time of this call we have $55 million available on our $137 million three-year line of credit. So we have the ability to deploy more capital for the right opportunity.

Moving over to the income statement, for the December quarter, net investment income was approximately $4.4 million versus $4.6 million for the same quarter last year, a decrease of 4.7%.

The decrease was primarily due to an increase in interest and dividend expense due to increased borrowings under our credit facility and payment of the first monthly dividend on the term preferred stock during the current quarter.

The term preferred stock diluted our dividend paying ability for the quarter, but as we put the proceeds we netted from the offering to work into new investments, we believe the term preferred stock will be accretive to our bottom line.

The effective interest rate on our credit facility during the three months ended December 31, 2011, was 6% compared to 6.7% for the prior-year period. However, our weighted average borrowings increased by $54 million during the same period. This was partially offset by an increase in investment income resulting from an increase in the weighted average principal balance of outstanding investments for the quarter ended December 31, 2011, when compared to the prior-year quarter by $69 million.

We increased the size of the portfolio significantly during fiscal year 2011 adding a net of 20 portfolio companies.

On a per common share weighted average basis net investment income for the current quarter was $0.21 per share compared to $0.22 for the quarter ended December 31, 2010.

100% of distributions paid in the first quarter of fiscal year 2012 were covered by net investment income. This highlights our commitment to sustainable distribution.

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 from accounting principles generally accepted in the US to mark our investments to fair value on our balance sheet, with a 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 investment activity, for the December 2011 quarter end we had a net realized loss of $8.2 million, which primarily resulted from the restructuring of KMBQ and the sale of Newhall Holdings. There were no realized gains or losses during the prior-year's first quarter.

From an unrealized standpoint, for the December 2011 quarter end we had net unrealized appreciation of $2.2 million over our entire portfolio, which includes the reversal of $11.5 million in unrealized depreciation, primarily related to the sale of Newhall Holdings and restructure of KMBQ. Excluding reversals, we had $9.3 million in unrealized appreciation for the current quarter.

The remaining net depreciation was primarily due to decreases in performance at certain of our portfolio companies, most significantly Sunshine Media Holdings and GFRC Holdings, partially offset by increases in other, most notably the science and related technologies.

Our entire portfolio was fair valued at 79% of costs as of December 31, 2011. The cumulative unrealized appreciation of our investments does not impact our current inability to pay distributions to stockholders, but does indicate that the value is lower and that there may be future revised losses that could ultimately reduce our distribution.

Our bottom line is the net decrease/increase in 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 December 2011 quarter end this number decreased by $1.3 million or $0.06 per share versus an increase of $2.1 million or $0.10 per share in the prior-year's December quarter. The year-over-year change is primarily due to the aforementioned net realized losses on investments totaling $8.2 million in the quarter ended December 2011.

While we believe our overall investment portfolio is generally stable despite 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, we invested in certain companies that later suffered through problems. We have in the past helped certain of our troubled portfolio companies fix their problems, and have turned such investments around, and had generally gotten all or most of our money back. That is one of the strengths we have in our operating team. We have the ability to fix certain problem companies.

And now I will turn the program back to David.

Thank you, David Watson. You got through all of that presentation with a very bad cold. We thank you for that. I hope all the listeners will read our press releases and study our quarterly reports, called a 10-Q, which we file with the SEC. You can access the press release and the 10-Q on our website at www.GladstoneCapital.com and also on the SEC website, www.SEC.gov.

And the big news this quarter, we continue to make progress with the portfolio companies. Generally speaking, it is getting stronger. We worked out two of our nonperforming loans. And while we didn't get all of our money back, we got back a large portion, and this lowers our loans on nonaccrual and also increases the income off of those that were on nonaccrual.

We were the first BDC to complete a public offering of preferred stock, which we believe will alleviate some of our need for long-term debt. We are still looking for long-term debt, but that helps us plug some of that.

We renewed our line of credit in January 2012 for three years. That is nice to have that out of the way. And all the bankers wanted to wait until January to renew the line of credit, and being cautious as we are, we stopped our new loan production to ensure that we had a line of credit in place before we started up again. But now we have that in place and so we can go forward at hopefully a much rapid pace.

We are back in the market. We are back in the marketplace looking for new deals, and at this point I think all of this is good news for shareholders, certainly our team and all of our customers that we have to bring into our portfolio.

Still our biggest challenge today is the long-term debt marketplace for our Company and for our portfolio companies. As mentioned, we have the line credit with supportive lending institutions. And the line of credit is working fine, and there will be sufficient for -- as a line of credit, but we still have to have long-term funding. And we substituted the new preferred stock for a portion of the long-term funding. And I guess we could do more if we need that.

In order to make a lot of new long-term investments we need to raise long-term debt and long-term capital, such as the issuance of preferred stock or certainly we would like to do some long-term debt.

Our portfolio companies, we worry that they're not able to get long-term senior loans if they need it. There are a fair number of regional banks that are making new loans based primarily on the assets of the business, and these asset-based lenders are certainly more plentiful than they have been in the last three years.

And I'm hopeful that at some point in time the banks will get back and extend long-term loans through our portfolio companies. And here we are looking for five, six and seven year loans, and they're just not out there right now.

I think things will get better as time goes on. Often times I get questions from people of what we're worried about. Certainly, oil is still way too high at $99 a barrel. We're still very worried about inflation and the decision by Congress and the President to expand the money supply. We are hearing now that the budget deficit will be $1.1 trillion again this fiscal year that ends in September.

Spending by the government continues to be off the charts and we are now borrowing $0.43 of every $1 that we spend today, and that is unsustainable.

The amount of money being spent on the war in Afghanistan is hurting our economy. We were glad to see that we pulled out of that bottomless pit that we were in. All of us support our troops, of course, and they're the true heroes of our period of history now and they're risking their lives every day for us, and we hope for their safe return and will come back soon from Afghanistan.

And, of course, the government is now talking again about raising taxes. I don't know how much more taxes people can pay. We are one of the highest paying tax places in the world.

The trade deficit with China is certainly -- nations such as China and others like them, they continue to subsidize their industry to the disadvantage of our business. I was filling up my gas tank this morning at $3.60 a gallon, knowing that in China it is under $2, probably $1.80, so they're about 50% subsidized on their oil and gas there, which means they can compete very successfully against our companies. And we watch our jobs leave the United States and go to Asia.

The continued downturn in housing, it is continuing to go down every single month, and no one knows how many more home mortgages will ultimately fail. And that has been the main reason for this recession and certainly the lack of a quick recovery.

And every time Greece or Italy or someone has a problem in Europe that comes back to haunt us in the stock market, because all of our banking systems are tied together and so many banks have loans to all of those countries.

And unemployment is far too high now. The number used by the government includes those that are working part-time, but seeking full-time -- and they have stopped looking, and doesn't include those who have stopped looking for work. A more realistic number for unemployment is probably 18%.

In spite of all those negatives, we are still out there looking at the industrial base and we see some good companies out there. It is not a complete disaster. The lingering recession has an impact on our portfolio companies. And like most companies, some of our portfolio companies haven't seen an increase in revenues or backlog; however, some others have seen tremendous increases and we're very happy about that, of course.

It is just a very uneven recovery that we are seeing in the economy today. We believe the downturn that began in 2008 has reached the bottom, and we're hopeful that the markets will continue to progress up by some pace, albeit very slow. But that is our belief and that is what we are investing based on that assumption.

Distributions to common stockholders is $0.07 per common share each of the months January, February and March. And the Board will meet again in April to consider distributions for April, May and June. At the distribution rate the common stock dividend is based on the price at closing at $8.95 yesterday. The yield is now about 9.4%, extremely high for such a good, solid company is ours is today.

And the distribution on our preferred stock is 7.125%. That coverage ratio is about 7 to 1, so that dividend is extremely well-covered. So that is $1.78 per year and the stock has actually moved up to over $25 as of yesterday.

As a reminder, we hold our annual shareholders meeting, Thursday, February 16, at 11 AM at the Hilton McLean Tysons Corner. It is just down the street from our offices at 7920 Jones Branch Drive in McLean. And if you haven't voted your shares for the proxy, please remember to do so before the meeting. We spend a lot of money going after these votes and we would like to get them all in, so we are finished with that by the time the shareholders meeting occurs.

Please go to our website, www.GladstoneCapital.com and sign up for e-mail notifications. We don't send out any junk mail, just news about your Company. And you can also find us on Facebook, the Gladstone Companies. And you can follow us on Twitter at Gladstone Comps, C-O-M-P-S.

In summary, I think we're moving in the right direction. The pace is set for us to do well in this calendar year. The term preferred offering has put in place one way of solving our long-term debt problem. And, you know, folks, as far as I can see, the US economy is going through a very slow recovery. And I think we are at the bottom and I think we will start up again with some good strength in this calendar year.

We can only see a few quarters out, so we'll remain conservative and not go crazy putting deals on the books. That is our investment approach, as you all know. And at this point in time if the operator will come on, we will open up the lines for analysts and shareholders who want to ask some questions.

(Operator Instructions). Greg Mason, Stifel Nicolaus.

David, you talked about now that you've got the credit facility locked up, your rate, and start looking at new investments. As we look back last year you did a significant amount of syndicate investments. As you're going forward do you think you're going to continue making more syndicated investments or more of the self originated that you find on your own?

We would do more syndicated loans if we found good ones out there. They're just very hard for us to find right now, because the marketplace for syndicated loans is so strong. We could easily sell off our syndicated loans, or most of them, pretty quickly if we needed to. So I would say that as you look forward we are mostly going to be doing proprietary originations rather than syndicated loans.

Then on the new facility, is there any borrowing base or other covenants restrictions or will you have full access to the $137 million if you choose it?

We should have full access.

Then in the Q I think there was the write-downs in Sunshine and Viapack and GFRC. First on Sunshine, we saw the rate change from about 10.5% to 5%. Did that new rate take effect at -- for the full quarter or was the quarter partially accruing that old 10.5% rate? I am just trying to get a feel for the impact on revenues?

No, it is at the new rate for the full quarter. We didn't run it at full price and then somehow book a lot of fictitious income. We booked what we received.

Then if you wouldn't mind just some quick comments on Viapack that was written down $1 million. I think that is still an accrual status, but I think it is only valued at $0.17 on the dollar. Just your view -- outlook going there for that income.

And then GFRC, I think that was also down $1 million. It looks like it is at $0.65 on the $1. So can you give us an update on those two investments?

Chip is following Viapack closer than I am, and that has been one that we're in the process of turning around, but go ahead, Chip.

Sure. If you recall, Viapack was a company that was moving along rather nicely and performed theoretically well all the way through the downturn until we had some significant accounting challenges and irregularities that showed up and causing us basically to have remove the CEO and the CFO there and take control of the business.

It has been a more difficult transition. And we forecasted we do have almost an entirely new management team in there. One of the issues with write-downs is that I think whenever you have an accounting irregularity, obviously that puts the entire performance of the business in question.

And so we are getting our hands around it. And obviously if we commit additional capital there that it immediately gets written down to whatever percentage the loan is valued at. So we're working hard on that one. And we have got a number of individuals in the firm that are focused on it. But at this point we're trying to work through the problems that we didn't create, but we inherited.

As to GFRC, a little better story there. This company, if you recall, basically makes cladding or skins for commercial buildings. So, obviously, that business has been off for a while and really hasn't recovered from the downturn. The good news there is that even though there was a marked down for the quarter, after the end of the quarter we signed a term sheet with the equity sponsor there to inject additional capital.

They have plenty of liquidity, and with the additional capital coming in we don't see any issues there on accrual for the remainder of the calendar year.

Great, thank you for that color. And one last thing, I know you said you got $1 million success fee in the first quarter and I missed which company that was with.

It was actually after the end of the first quarter. It was Global Materials Technologies. And we had only about $2.8 million of remaining principal in that deal, and when they refinanced they paid us the $1 million of success fees. So you will see that in the quarter ended March 31.

Great, thank you guys.

David West, Davenport & Company.

I am first curious, you had the two situations regarding nonaccrual loans where one restructured and one sold. Was this part of a new strategic focus or just more opportunistic situations?

I can say that the radio station was something that we have been working on for some time. We have had to put a receiver in. And of course that got written down dramatically by the rating agency that writes those down, and we use their numbers. And, obviously, the return on that is dramatic even though we had to write-off some of it.

I think that one is fine. And Chip, why don't you talk about the one you worked at?

Newhall Holdings, this was a situation that had been marked down considerably last quarter. The company had been for sale, but the consumer products basis of that revenue base had declined, and the equity sponsor refused to support the business. And so we had the company up for sale for a sizable amount of capital and, quite frankly, the bids just weren't there to justify it.

We looked at the situation and said, this is a reasonable solution to a company that we don't have any better ideas of how to turn the company around and the sponsor wasn't willing to support it. So the assets were sold for less than we had hoped, but a better recovery than we had in March. So we will move on from Newhall Holdings and hopefully not have that issue again.

But do you think there is much likelihood of further transactions regarding some of the nonaccruals in the current quarter?

I don't have way one right now that I think. We actually have a company that is in the nonaccrual bucket that we are negotiating a sale of that would be a good, good transaction for us if it works out. So we're continuing to work on them, but I don't know that we have any indicated write-offs for the current quarter at this point.

And just doing a quick calculation it looked like with the preferred and the borrowings on the line of credit you have about the 46%, I guess, leverage relative to your net assets. What is the comfort factor as far is increasing that toward 100% before you feel like you would have to raise common equity?

Well, generally speaking when we get up around 50%, we start thinking about is there a way to make this a lower leverage. But I feel comfortable now that we have a line of credit in place for three years and the preferred doesn't come due for five years, that we could probably run that up to 75%.

Great, very good. And then just a technical matter. You had that line item for restricted cash on the balance sheet this quarter, what does that relate to?

David Watson.

That relates to some escrow proceeds we received related to the Newhall sale that will run their course over the next year or so.

Okay, great. Thanks very much.

All right, just one other footnote on transactions. We have one company that we worked out. It is in good shape, and we have asked to sell it, and so it looks like we will probably sell that in the calendar year that we are in. Next question please.

[Brian Berne], Private Investor.

Do you have any projections in terms of -- or for this coming year, our fiscal year, either in terms of dividends and/or earnings?

We don't put projections out and we don't do the way some people do is advise you of what they're trying to do, other than the fact that our goal is to increase the dividend.

We're in a much stronger position now that we have reduced some of our nonaccruals, so the hope is that in this calendar year we can move forward and maybe raise the dividend. But just at this point in time there is no way of giving you a forecast on that.

Thank you.

(Operator Instructions). J.T. Rogers, Janney Montgomery Scott.

A quick question on sourcing debt. I am just wondering where you are looking and where you think you might be able to find additional long-term debt capital?

We tapped the preferred marketplace because we haven't been able to find good long-term debt. But we have a couple of letters that we have received from some long-term lenders and we are currently working on those for both this company and for Gladstone investments. So we'll just have to see if those pan out.

They're actually cheaper than the preferred stock, but not that much. And we just have to see if the conditions on those will be limiting in our ability to move forward, and also have to work out the relationship with our revolving line of credit lenders. So we're working on it, and hopefully we can announce something in the next six months that we put that in place.

Great. And then the revolver, it looks like you extended out three years, making it a significantly longer maturation that you had before. I was wondering if you were looking at adding any additional lenders to that facility?

We probably won't do that until we get into the line a lot more than we are today. And then we contacted a couple of revolving lenders. Believe it or not, there are not that many lenders that lend to finance companies in the world today. So as a result a little bit limiting in the number of people that are in the business of lending to business development companies.

All right, thanks a lot.

Jeff Rudner, UBS.

A question for you and Chip about investment philosophy, in that you mentioned one of your concerns was the possibility of inflation increasing again. Or on the other hand, Ben Bernanke has come out recently and indicated he is not only more concerned about deflation than inflation, but indicated that interest rates will probably stay where they are now through 2014.

Obviously, there is no way of knowing or predicting how low interest rates will stay and for how long, but when it comes to investing the portfolio's monies, the more you are concerned about inflation, obviously, the more you would be looking to make variable rate loans versus someone who is less concerned about inflation who would like to get a higher rate on a fixed-rate loan, not thinking that the rates will go up over a near-term period.

So how does that -- the conflict between you and Ben Bernanke affect the investment philosophy of the team?

We are all hoping that Ben Bernanke won't be reappointed, but assuming that he will be, we can't judge what they're going to do. I can remember back in the early 1980s when Volcker came in and took the bitter pill and we all saw rates go crazy up. So we are protected from that happening. If it should happen this time, Mr. Bernanke gets thrown out and somebody with a more conservative bent is put in.

I think it is still better for us to have variable rate loans. They are are reasonably high. I think all of our loans, especially the new ones, are in the 10% or above range, even though they're variable. So as a result, we're not compromising our returns by not doing fixed-rate loans in this marketplace today. And we want to remain conservative in the hopes that something will go forward and the economy will be fixed. And one of the fix is going to have to be paying higher interest rates.

This is David Watson. I guess I would point to the fact that only 6.3% of our debt investments are at fixed-rate. All the other ones are in variable rates, and of those 87% of them have a floor.

Okay, great. Thanks, David. And thank you, David.

(Operator Instructions). Mr. Gladstone, I am showing no additional questions in the queue. I would like to turn the conference back over to you for any closing comments.

All right, thank you all for dialing in. We appreciate it and we look forward to some good news for you when we meet again at the end of the March 31 quarter. That is the end of this call.

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