Gladstone Capital Corp (GLAD) 2012 Q2 法說會逐字稿

Good morning, and welcome to the Gladstone Capital Corporation Second Quarter Ended March 31, 2012 Shareholders Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

And I would now like to turn the conference over to David Gladstone. Please go ahead.

All right. Thank you, Emily, for that nice introduction and hello and good morning to all of you out there. This is David Gladstone, the Chairman, and this is our quarterly earnings conference call for shareholders and analysts of Gladstone Capital. Stock's traded on NASDAQ symbol GLAD and we also have our preferred stock now traded on NASDAQ under the symbol GLADP for preferred.

Both of those are in the Global Select trading markets and you've noticed a recent transfer of the listing from our preferred stock from the New York Stock Exchange to NASDAQ and I'll talk about that a little later. Thank you all for calling in. We're always happy to talk to shareholders about the Company. I wish there were more. We've talked about having an interim call and no news on that yet.

We hope you all take the opportunity to visit our website at www.gladstonecapital.com where you can sign up for e-mail notices. You'll receive information about your Company in a very timely fashion, so it's a good place to get information from. Please remember that if you're in the Washington D.C. area and you have an open invitation from us to visit us here in McLean, Virginia, suburb of Washington D.C., please stop by and say hello, if you're in the area you'll see some of the finest people in the business.

Now let me 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 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 and other factors even though they may be based on our current plans, and we believe those plans to be reasonable.

Many of these forward-looking statements can be identified by the words such as anticipate, believe, expect, intend, and will, and should, and may and all of those kinds of the similar expressions. There are many factors that 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 "Risk Factors" in our 10-K and 10-Q filings and certainly on our prospectus as filed with the Securities and Exchange Commission. All of those can be found on our website at www.gladstonecapital.com and also on the SEC website.

Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this conference call. Please also note that past performance or market information is not a guarantee of future results.

Well, we'll start off the presentation as we always do with the President, Chip Stelljes. Chip is our Chief Investment Officer of all the Gladstone publicly traded funds and he'll provide a review of the Company's last quarter. Chip?

Good morning. This quarter, the second quarter of our fiscal year, we invested $8.5 million in one new portfolio company and we continue to focus on managing our portfolio investing $7.9 million in existing portfolio of companies in the form of additional investments or draws on revolver facilities.

And during the quarter, the Company had repayments, which included normal amortization and pay-downs on revolvers, of approximately $13.7 million. This also includes three early payoffs at par during the quarter, which generated success fees of $2 million during the period and a total average return on those three deals of 14.8%. So in total, we had a net production increase in our portfolio of approximately $2.7 million for the quarter ended March 31, 2012. We funded this net increase in production from operating income and draws on our credit facility.

As mentioned on our last call, we extended the maturity date on our $137 million revolving line of credit by nearly three 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. Interest rates remain unchanged under the amendment at an all-in rate of 5.25%, and all other terms of the facility were substantially unchanged.

Subsequent to quarter-end, we invested $0.7 million in four existing portfolio companies and we received $1.8 million in repayments. We continue to see solid investment opportunities in an improving marketplace, which are in line with our investment objectives, although there seems to be a good deal of capital and competition in the market for the most attractive deals.

We are pretty far along in the closing process on two proprietary investments totaling $26 million and expect to close them in the next few weeks, if not days. So expect some news there. As our pipeline continues to build, we expect our portfolio production will increase in the next quarter or two in accordance with our objectives.

We're very pleased we're able to access the long-term capital market in November 2011 by raising $38.5 million in term preferred stock. We believe this along with the extension of our credit facility until 2015 will provide us the capital to grow the portfolio and increase our net investment income over the long term.

At the end of the second quarter of 2012, our investment portfolio was valued at approximately $288 million versus a cost basis of $373 million or approximately 77% of cost. This fair value to cost percentage is lower than last quarter, which was at 79% resulting from continued declines in Company performance in certain of our portfolio companies and the early payoff of some good loans.

At the end of our first quarter, we had eight portfolio companies either fully or partially on non-accrual status. We added the last out tranche of both Sunshine Media Holdings and Viapack to non-accrual status effective January 1 in order to give them some breathing room as they move forward with their business plans.

We're able to decrease our non-accrual companies last quarter by two through a sale and a restructuring. We remain focused on managing other portfolio companies on non-accrual, but move more of them off of non-accrual status over the next several quarters.

The investments classified as non-accruing have a cost basis of $43.8 million or about 12.1% of the cost basis of all debt investments in our portfolio as of March 31, 2012. From a fair value perspective, the non-accruals fair value represents $4.6 million or about 1.7% of the fair value basis for all debt investments in the portfolio at quarter-end.

As a lender we continue to have a high concentration of variable rate loans, so when rates begin to increase we should have higher income, and while our rates are variable they usually have a minimum rate or floor. So the effects of declining interest rates are mitigated. The target to have a large part of our portfolio with variable rates accompanyed with minimum floors with the remainder at fixed rates. As of March 31, 2012, approximately 88% of our loans had cost at floors, 6% of our loans do not have floors or ceilings and the remaining 6% have relatively high fixed rates.

Weighted average floor of our variable rate loans is 2.4%, with an average margin of 8.4% resulting in an all-in average rate of 10.8%. Another measure of the quality of our assets is that our average risk ratings on our overall debt investment portfolio for the quarter remain relatively stable. Our risk rating system attempts to measure the probability of default on debt securities and in the probability of loss, if there is a default, 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 to our non-syndicated loans, which constitutes about 74% of the principal balance of our debt, showed a weighted average rating of 5.5 as of quarter-end, which is an increase from where it was at fiscal year-end at 5.3 and representing slightly lower probability of default. That's where our weighted syndicated loans, which make up about 17% of the principal balance of our debt investments, they had a weighted average rating of B/B2 for the quarter-end, which remained unchanged from fiscal year-end.

Our unrated syndicated loans represented about 9% of the principal balance of our debt investments and had a weighted average rating of 4.9%, which was down slightly from 5.0% at fiscal year-end. Quality of our income continues to be good. As we've 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 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'd be required to pay out cash and distributions on non-cash income. We had no PIK income during the first and second quarter of fiscal year 2012 and had minimal amounts in fiscal 2011. We recorded original issue discount income in the second quarter of 2012 of $100,000, which is consistent with prior quarters.

We recognized success fees over the past quarter of $2 million. As a reminder, success fees are contractual due upon the sale of a portfolio company and are generally not recognized until they're received. To provide a little color as to the amount we have in our portfolio as of March 31, 2012, approximately 45% of our interest-bearing debt and 64% of our proprietary debt have success fees related to them, but have an average contractual accrual rate of about 2.5%.

In all, we have approximately $13.9 million in accrued success fees, which are not reflected on our balance sheet as of March 31, 2012 on our debt investments that are on accrual status. There are no guarantees that we'll be able to collect all these success fees and know the timing of such collections due to their contingent nature.

The senior and senior subordinated debt marketplace for large and middle-market companies continues to improve albeit inconsistently. We believe there are still encouraging economic trends in this marketplace coupled with some decent liquidity.

The market for loans to companies at the lower end of the middle market in which we seek to invest our capital, we'll see more competition, but not again from banks, competition is really coming from other public funds like ours and many small private funds. Our loan request pipeline has been building in addition to the two pending investments that I had mentioned. We hope to show you some more quality investments over the next several quarters.

And with that I'll turn the presentation back to David.

All right, Chip. Good report. Now, let's turn to the financials. For that we will hear from David Watson, our Chief Financial Officer.

Good morning everyone. Yesterday, we released our fiscal second quarter earnings press release and 10-Q, which I hope you've had a chance to read. On this call, I will cover some of our financial highlights starting with the income statement. For the second quarter ended March 31, 2012, net investment income was $5.2 million versus $4.4 million for the same quarter last year, an increase of 17.8%. This increase was primarily due to an increase in interest and other investment income.

Interest income increased by $1.7 million or 22.8% during the three months ended March 31, 2012 as compared to the prior year period. This was due to an increase in the overall portfolio size as compared to the prior year period.

The annualized weighted average yield on our interest-bearing debt investments was 11% for the second quarter of 2012 as compared to 11.3% for the second quarter of 2011. The decrease in the yield is primarily due to increased syndicated investments, which generally bear lower interest rates, as well as restructuring of certain of our debt investments, interest rates and to lower yields.

Other investment income totaled $2 million for the three months ended March 31, 2012, an increase of 84.3% over the prior year period and resulted from success fees from the early payoffs at par by two of our companies. Offsetting these increases in net investment income were the increases of $1.2 million in aggregate of interest and dividend expense due to increased borrowings under the credit facility, and the payment of the term preferred dividends. Our weighted average borrowings, including our term preferred stock, increased during the three months ended March 31, 2012 by $86 million over the prior year period.

For the six months ended March 31, 2012, net investment income was $9.6 million versus $9.1 million for the same period last year, an increase of 6.3%. The increase was primarily due to an increase in interest and other investment income due to the same reasons that I described for the quarter ending increase. And again offsetting these increases to net interest income were the increases of $2.9 million in aggregate of interest and dividend expenses again due to the same reasons described for the three-month period.

On a per weighted average common share basis, net investment income for the current quarter was $0.25 per share compared to $0.21 for the quarter ended March 31, 2011. Net investment income per weighted average common share for the six months ended March 31, 2012 was $0.45 per share compared to $0.43 per share for the six months period in the prior year. 100% of distributions paid in the first and second quarters of 2012 were covered by net investment income, which highlights our commitment to a conservative distribution policy.

Let's turn to realized and unrealized changes in fair value of our assets. Realized gains and losses come from actual sales or disposals of investments. Recognition of net unrealized appreciation and depreciation on the income statement is a US Generally Accepted Accounting Principle or GAAP requirement to mark our investments to fair value on our balance sheet, with the net change in fair value for the reported period getting recognized in our income statement. Unrealized appreciation and depreciation is a non-cash event.

Regarding our realized investment activity, we had minimal realized net gains for the second quarters of both 2012 and 2011. For the six months ended March 31, 2012, we had a net realized loss of $8.2 million, which primarily resulted from the sale of KMBQ Corporation and Newhall Holdings.

From an unrealized standpoint, for the March 2012 quarter-end, we had net unrealized depreciation of $7.2 million over our entire portfolio. The largest drivers in our net unrealized depreciation for the three months ended March 31, 2012 were the unrealized depreciation of [three investments] primarily resulting from a continued decline in these portfolio companies' financial and operational performance.

At March 31, 2012, the fair value of our investment portfolio was less than its cost basis by approximately $84.8 million and our entire investment portfolio was valued at 77.3% of cost, as compared to cumulative net unrealized depreciation of $77.6 million and a valuation of our entire portfolio at 79.1% of cost at December 31, 2011.

The cumulative net unrealized depreciation of our investments does not impact our current ability to pay distributions to stockholders. It does indicate that the value is lower and that there may be future realized losses that could ultimately reduce our distribution. Our bottom line is the net decrease in net assets resulting from operations. This term is a combination of net investment income, net unrealized depreciation or appreciation, and net realized gains or losses.

For the March 2012 quarter-end, the net decrease in net assets resulting from operations increased to $1.6 million or $0.08 per common share, but it was $8.4 million or $0.40 per common share in the prior year's March quarter. The year-over-year change is primarily due to a $13.1 million in unrealized depreciation recorded in the second quarter of 2011 on our investments.

For the six months ended March 31, 2012, the net decrease in net assets resulting from operations increased to $2.9 million or $0.14 per common share versus $6.2 million or $0.30 per common share in the prior year's period. The year-over-year change is primarily due to the $16 million in unrealized depreciation recorded in the six months ended March 31, 2011 on our investments.

Moving over to the balance sheet, as of March 31, the second quarter of our fiscal year, we had approximately $311 million in total assets consisting of $288 million in investments at fair value and $23 million in cash and other assets. Our borrowings totaled $65.8 million at cost on our line of credit.

In addition, as mentioned in our last call, during the first quarter of fiscal 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 proceeds from the offering to repay a portion of the outstanding balance on our line of credit.

Due to its mandatory redemption feature, we classified the preferred stock as a liability on our balance sheet as of March 31, 2012. Related to this offering, we incurred $2.1 million in deferred offering cost during the first quarter, which we recorded as an asset on our balance sheet and are amortizing over the redemption period ending December 31, 2016.

For the quarter ended March 31, 2012, we had $202 million in net assets as compared to $214 million in net assets as of our fiscal year ended September 30, 2011. This represents a NAV per common share of $9.62 as of March 31, 2011, as compared to $10.16 as of September 30, 2011. Therefore, we continue to be less than one-to-one leverage and we believe that our overall risk profile is low.

At the time of this call, we have about $32 million available on our $137 million line of credit and $32.4 million in cash. So we have the ability to deploy more capital for the right opportunities in line with our investment strategy.

And now I'll turn the program back to David.

All right. Thank you, David Watson. That's a very good presentation, very thorough. I hope all of our listeners will read the press release that we put out and study our quarterly reports called the Form 10-Q. We filed those with the SEC yesterday. You can access the press release, the 10-Qs and all of our other reports on our website at www.gladstonecapital.com and also on the SEC website.

I think some of the big news this quarter was despite the sluggish economy we're able to continue to make progress with our portfolio companies and exit a few of them as well. We received that $2 million in success fees from a couple of the exits that paid off at par.

I do want to just stop and say, I don't think we get a lot of credit for not using the non-cash ways of increasing income that is paid in kind. Those are all phantom incomes with no income really coming in, but here we use success fees. As you can see, this quarter we got $2 million of those in and we didn't recognize that until we got the cash unlike paid-in-kind income.

The other big news is renewed our line of credits in January for three more years and also our pipeline is improving. We have a lot of new investments that are coming along. We expect to close several proprietary deals over the next few weeks. In fact, one may close this week, which will move us right along in the direction that we want to go in the second half of 2012.

In February 2012, we held our Annual Shareholders' Meeting where all of the proxy proposals that were in the proxy, including we wanted to sell our common stock at price below NAV per common share was in there. All of those passed and that's then reported as well to you and all the folks out there.

At this point, I think the good news, all of these are good news for our shareholders and our team and our customers and I think we're on the right track to show some big improvement in 2012. Our biggest challenge today is long-term debt for our Company, as well as our portfolio companies.

We have a great line of credit and supportive lenders for our line of credit, but that's all short term and we believe it's sufficient for the near term and it helps us do deals and then turn around and refinance them with hopefully long-term debt.

We issued some preferred stock as a substitution for long-term debt and this will help us make a lot of long-term investments that we need in the future. And we need to raise additional long-term debt or long-term capital such as the issuance of preferred stock in the future in order to continue our growth.

We also worry that our portfolio companies will not to be able to get long-term senior loans that they need. Now, there is a fair number of regional banks today that are making new loans based primarily on the assets of the business and all of these asset-based lenders are certainly much more clinical than they were even last year and we hope to get some of the banks to extend long-term loans to our portfolio companies. And I think the banks will be better this year than they were last year although everything is still very tight at some of the banks.

Our concerns continue to be oil prices. Oil and gas prices are high and the high gas price, of course, for cars and trucks hurts every business in the United States. We're worried about inflation. The decision by Congress and the President of the US to expand the money supply will ultimately cause serious inflation. I know some of you who are economists follow the M1, M2 numbers and while they're up, the velocity is way down from compared to where it should be and so that's a real drag on the economy today.

The spending by the Federal Government is off the charts. The government can't continue to print money the way they do. They're now borrowing 43% of every dollar that they spend and in the remainder of 2012 they'll probably be up around 50%.

As most of you know, we sold a lot of our debt to China over the past years. China has now stopped buying our debt. They're actually selling our debt into the open marketplace. The fed is the one that's buying all the money and that's just equivalent to printing money. And so in essence, they're running the printing presses over to government in order to cover the deficit spending.

And so, the amount of money that we're spending not only on our own things here at home, but also in places like Afghanistan building our economy, we'll certainly support all of our troops there in Afghanistan and hope that they come home safe and very soon as has been promised. And of course, the government is now talking about raising more taxes.

They don't talk about cutting spending, but they do talk about raising taxes and I just don't know how our economy can compete around the world at huge taxes on both businesses as well as individuals. Trade deficit with China, I mention this each time only because it's so terrible. China continues to subsidize the industries to the disadvantage of our businesses when they're competing for business around the world. This, of course, means that our companies can't compete with them for -- and that's the reason the jobs leave the United States and go to places like Asia.

The continued downturn in the housing industry and the related disaster in the home mortgage default area continues to drag down the economy and no one seems to know how many more home mortgages will be ultimately failed and people have to move out of their houses. But there is a terrible thing going on out there in the marketplace and until that stabilizes I don't think we're going to see a lot of progress there.

We see the economic problems in the Eurozone and that may hurt some companies, but we don't have any investments in Europe and our investments in our US companies don't have that much contact with Europe or any other parts of the world, they're mostly in the United States. And so we're very lucky from that perspective.

And unemployment in the US is far too high. It has made some significant changes over the last months and we're hopeful that that will continue, but I would remind you again that the numbers used by the government as to who is working and who is not is very fluffed up.

A lot of people are working part-time. They're seeking full-time work. There are a lot who have stopped looking at all and those are not counted. I think a more realistic number, at least the ones I've seen using the rates that we should be looking at are about 18% in the United States of people that are underemployed or not employed at all.

In spite of all the negatives, the industrial base that is what's left of it in the United States is not a disaster. The lingering recession hasn't had an impact on our portfolio companies, but again it's not a disaster like it was in 2009.

Like most of the companies, and some of our portfolio companies have not seen an increase in revenues are in backlogs. However, others in our portfolio are seeing incredible increases and a few others are seeing astronomical increases. So we're seeing a very uneven economy as some industries and some companies do well and others are still lagging way behind.

We believe the downturn that began in late 2008 has reached the bottom and we're beginning to see some economic improvement. I don't see another downturn coming, but I don't see a big upturn coming as well. A very poor economy that we're in right now and I just don't think the US government has done enough to help. It would be great if the banks lend more, it'd be great if they would reduce the regulations that are on so many businesses now.

Our monthly distributions to our common shareholders continues to be $0.07 per common share for each of the months ending April, May and June of 2012 and the Board will meet again in July to consider the monthly distributions for July, August, September of 2012. Current distribution rate on our common stock, with the common stock priced at about $8.01 as it was yesterday and it closed gives the yield on the stock today at 10.5%, I would tell you that that's a very high distribution and continuing the strength of our Company.

Another thing to look at is our monthly distribution on our preferred stock and that 7.125%, which translates into $0.1484 per month or $1.78 annually. The term preferred stock is closed at a market price yesterday of $26. That means the yield is 6.85%, down from that 7.125%. That just shows the strength of the preferred stock.

As you noticed, we told you we switched from New York Stock Exchange over to the NASDAQ Global Select Market and it trades under the symbol GLADP. We've moved it over there because all of our stocks have traded on NASDAQ, we only had the one item on New York Stock Exchange and quite frankly it was very difficult to manage both ways. So in order to cut cost, we changed it over and it just started trading yesterday. As all of our companies are they're on the NASDAQ Global Select and you can find them all by just typing in, for example, on the preferred GLADP and you will get a quote.

Now, please go to our website at gladstonecapital.com and sign up for e-mail notification. We don't send out junk mail, just news on your Company and you can also find us on Facebook under the key word, the Gladstone Companies and you can follow us on Twitter. We don't put a lot of information on Twitter, but you can find us at Gladstone comps, and we will try to keep the information flowing.

I think we're moving forward at a good pace now with the proceeds netted from the preferred stock offering. We should show some good progress in this fiscal year that ends September 30, 2012. You know folks as far as we can see, the US economy is going through a very, very slow recovery. I think the economy has reached bottom. I think we're moving up now.

The next two quarters will help us all figure this out. But remember we're still stewards of your money. We'll stay the course and continue to be conservative and disciplined in our investment approach and I hope all of you continue to follow and see the stock as a good opportunity to acquire at a low price.

Okay. If you'll come on board now, we'll open up the lines to analysts and to shareholders who want to ask some questions.

(Operator Instructions) [Barry Burns], a private investor.

Thank you. Thanks, and great quarter. I just -- couple of quick questions, one is what are you seeing in terms of private equity with regard to some of our portfolio companies, are you seeing more interest in terms of opportunities there? Number two is, do you have an appropriate level for what you think our -- the draw at any given time on our credit facility is? And then last question is, any thoughts, assuming all things being equal, what would you guesstimate the likelihood of being able to increase the dividend this year, calendar year?

All right. The private equity question, we do see private equity companies come in and look at some of our companies for acquisition, particularly these smaller businesses for the larger private equities are good, what they call a bolt-on that is they're rolling up an industry and they'll come and buy those.

We are looking at one right now that we may sell during the next six to eight months, who knows at this point in time. And then, as you probably know, Barry, there are just tons of private equity dollars out there to buy companies. There is a lack of subordinated debt and that's where we play a role, but it's a very frothy marketplace from the standpoint of private equity. They've got plenty of money and they are spending it.

On the credit facility, we'd like to leave some room under the credit facility. Obviously, we've got plenty of room today since we paid it down with the preferred stock. So we're in great shape. I don't really have a number other than obviously as we get close to the magic number of two-to-one leverage or as we get close to the fact that the borrowings are getting up close to the amount that we have under the line of credit.

We end up either stopping investing as we have done in the past or we raise common stock or preferred stock in order to pay it down. And I would say once we'd cross the $100 million mark and move up to say $110 million, that would be start to get us in a point in time when you would feel like we really need to look at the world a different way.

We don't want to go up against the full line of credit and have no room for anything. So you will have to watch for that. And in terms of being able to increase the dividend, we've got a couple of problems in the portfolio that I want to fix before we consider increasing the dividend. And I think as we add a couple more transactions to the portfolio, you'll see the income begin to increase.

And I think as we fix a couple more of these, you'll see that this summer. I think we'll be in a position to discuss maybe in our -- for our June quarter, but certainly for our September quarter start to discuss what we might do in our year ending September 2013 in terms of increasing the dividend, but probably nothing during this summer in terms of increasing the dividend. Any other questions, Barry?

[Thank you very much].

Okay, next question.

J.T. Rogers, Janney.

Good morning, David. Thanks for taking my questions. I guess first off, it sounds like you got two new deals on the horizon. Can you provide any detail on what industries those are in and maybe where you're seeing the best opportunity?

Oh, J.T., I wish I could answer that question. That's the sort of the kiss of death when you talk about one that's about to close. It just seems like it slows it down. So rather than talk about it I'm afraid you're going to have to wait for the press release to get the information.

Okay, sure, no problem. You also have, I guess, over the next six to 12 months a number of scheduled maturities. I was wondering if you're seeing the new deal flow essentially replacing those deals as they're refinanced out or do you -- on balance, what do you think -- your current borrowers are thinking in terms of, I mean, refinancing out your debt or restructuring their existing investments with you?

Chip Stelljes is going to answer that one.

Yes, it's a mixed bag. I mean we have scheduled in our projections internally all of our contractual repayments that we're expecting we know one of our companies, that's a sizable investment, is going to be put up for sale. We've been invited to be part of the process of financing that deal with a new buyer, which we may or may not do depending on who that is. We do seem to have enough pipeline right now to replace the maturities that are coming, so we could get them all across the line or not, I don't know.

At least one company that we were told that we were going to be taking out of because they were going to sell it, they've now changed their mind and have asked us to come in and finance an acquisition with them. So it's moving pieces all the time depending on a number of these private equity shops that we're working with and what they're trying to accomplish for their portfolio.

But feel like the pipeline is good enough that if these scheduled repayments come in, then we'll be able to replace them. And in some cases, with hopefully higher yielding debt because a number of these were very successful companies and over the time period, the returns have come down as we've kept those loans on the books.

Okay, great. Yes, sort of on the portfolio looking at BAS, Heartland and Sunburst Media, I guess they continue to be weak. I guess some of that's been attributable, I think you've all said before, to weak auto advertising. I was wondering if you could talk a little more about what's going on with these companies and sort of what the risk is that we may be seeing uptick in non-accruals given that these guys are being valued at $0.50 or below on the dollar?

Well, I'll let Chip go into that, but just as so everybody knows we try not to go into detail on a per company basis simply because these are private companies and they haven't given us permission to go out and talk about their numbers. But, Chip, you want to talk about that area?

Yes, I mean the ones you mentioned, BAS, Heartland, Legend, Sunburst are radio stations, all four are radio stations and that obviously is an industry that is still sort of out of favor and I think the marks may reflect that on those. I would tell you that a number of those aren't doing particularly -- aren't doing worse than they have been doing. They're all performing in that they're making their interest payments.

One or two of those have had some challenges making principal payments, but we're not injecting any capital into them and they're making their payments. So at least one of those has threatened to refinance this, which will be fine. But there's one -- one of the ones today that people don't want to talk about individual, one is struggling more than the others, but the others are about where they've been. So I think the marks are reflective of S&P and not necessarily indicative of the situations deteriorating.

Okay, that helps a lot. And just sort of -- it seemed like there were a lot of markdowns during the quarter in terms of fair value to sort of across the board. Anything changed at S&P, anything changed from what the fundamentals for the portfolio broadly, so I would have thought that you might have seen more portfolio appreciation rather than depreciation this quarter?

I don't know -- I don't think there's been any changes at Standard & Poor's, who gives us some marks. Obviously, the Board of Directors is the final determinant and they followed S&P. I don't think they've ever changed an S&P mark, but they do make a final determination.

So I wouldn't blame it on S&P other than they continue to be very conservative, very rearview mirror looking in terms of the world, never looking forward to the future. So, as a result, I would say that it's just sort of standard operations is going on in the marketplace and I don't -- I can't attribute it to anything at this point.

Thanks a lot for taking my questions.

All right. We'll go from J.T. Do we have a question from somebody else?

Greg Mason, Stifel Nicolaus.

Great. Good morning, gentlemen. Thank you. A lot of my questions have been answered. But I guess one question I had on Sunshine Media, you had restructured the debt, re-priced those interest rates lower last quarter. So I was surprised to see the term [B piece] going non-accrual. What's the potential for that $17 million first lien piece going on non-accrual given that it's a $0.15 on the dollar, how should we be thinking about our confidence in that piece remaining on accrual status?

Chip's close to that one, so Chip, go ahead.

Yes, not to talk too much about Sunshine particularly, but Sunshine as we mentioned before in this call is a work in progress. We've been maneuvering this company to higher value-add products and services that takes time and investment. We lowered the interest burden to the company this time, proved to give them some more running room.

We've got two Gladstone professionals dedicated almost full-time to the company working with the senior management team there. We've been working hard on this one, but there is the possibility that we may have to place the entire investment on non-accrual if the efforts that we're placing on it don't translate into a stronger company and better results. And we've started to look at that as an option that we obviously are not excited about, but we want the company to succeed.

I'll just add one thing on Sunshine. They have some new products that they introduced that haven't taken off as quick as possible. They are incredibly strong products for hospitals and this is for marketing for hospitals and it's just taking -- I guess we should have planned it a little bit different, but their product once it's compared to any of the competitors, which aren't even close in terms of the dynamics of the product and this is software product.

Assuming that product takes off as it should over time, this will be a dynamite company. It's just going to take us a longer time to get there than we had ever anticipated and that was the mistake that we probably made on that one is determining that it would happen sooner rather than later.

But once this software gets in place, it's pretty much guaranteed to stay in place because it is so strong for the marketing in hospitals and I would guess that next year when we'd look back at this, that product will have blossomed and it's in, I don't know, half a dozen hospitals now. So just give it a little more time. We're trying to ease up on them and not accrue a lot of interest in order to give them breathing room to market that product.

Great, great color. And one last question, one of your big winners in the portfolio Defiance, you've got almost $9 million of appreciation in that common stock piece. What's your ability to affect the monetization of that equity piece and be able to redeploy it into yielding assets?

The good news is that that's one that's -- there are others as well, but that one is going along at extremely fine rate and we've had inquiries about it from a number of different buyers and I don't know what we'll do there, but you just have to stay tuned. I think that could be sold and obviously given the losses that we have from our prior periods we would shelter that capital gains and redeploy it into something that would be income producing. Little bit early to talk about it although lots of activity there.

And do you control the exit timing on that investment or is this controlled by a private equity guy and subject to what their decision is?

Chip's riding this one, so I'll let him finish off.

The answer to the question is we do control the exit on it. The story here which is a good one for us is this was a private equity backed company that in the downturn the private equity guys walked from the deal and we supported it and worked with management and now we are in control of the company.

All right. Great. Thank you, gentlemen.

Okay, Greg. Thank you for your question. Do we have some other questions?

(Operator Instructions) At this time, I'm not showing any questions so this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Gladstone for any closing remarks.

All right. Thank you so much for all of your questions and we enjoy this time together and if you have questions you can lob them into our [trusted] HR person here -- our --

Investor Relations.

Investment relations. HR would be the wrong place, investor relations person, and Lindsay is always ever present at the Company and ready to take your questions and hopefully she can answer them. And that's the end of this call.

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