Gladstone Capital Corp (GLAD) 2012 Q3 法說會逐字稿

Good morning. And welcome to the Gladstone Capital Corporation's third-quarter ended June 30, 2012 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. Mr. Gladstone, please go ahead.

All right, thank you, Amy, for that nice introduction, and hello and good morning to all of you who have called in. This is David Gladstone, Chairman, and this is the quarterly earnings call for shareholders and analysts of Gladstone Capital.

Common stock is traded on the symbol GLAD and the term preferred stock trading symbol is GLAD with a P on the end, both of which are traded on NASDAQ and thank you all for calling in. We are always happy to talk to shareholders about our Company, and I wish we could do it more often.

We hope you will take the opportunity to visit our website at www.GladstoneCapital.com where you can sign up for e-mail notices so you can receive information about your Company on a timely fashion. And please remember that if you're in the Washington DC area, you have an open invitation to visit; if you're in McLean Virginia, please stop by and say hello. You'll see some of the finest people in the business.

Now I'll read a statement about forward-looking statements. This conference call may include statements that may constitute forward-looking statements within the meaning of the Surety 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 and other factors even though they are based on our current plans and we believe those plans to be reasonable. Many of these forward-looking statements may be identified by the words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. 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 "Risk Factors" in our 10-K and 10-Q filings and the most recent form that we filed on the N-2 registration statement, all of these filed with the Securities and Exchange Commission and can be found on our website at www.GladstoneCapital.com, and also on the SEC website at www.SEC.gov.

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, after the date of this conference call. Please also note that past performance or market information is not a guarantee of future results.

As we do each time, we start with our President, Chip Stelljes. President is also -- Chip is also the Chief Investment Officer of all of our Gladstone public funds. He will provide a view of the Company's last quarter event and an outlook for the Company over the next several quarters, so Chip, take it away.

Okay, good morning. During this quarter, the three months ended June 30, 2012, the Company's net production totaled $21.4 million due primarily to new investments totaling $33 million. We invested $16 million in debt and equity in Francis Drilling Fluids, a logistics network provider to oil and natural gas drilling companies, and we invested $12 million in senior and senior subordinated debt investments in POP Radio, an advertiser supported in-store audio network. In addition, we invested $3.6 million in existing portfolio companies through a revolver draws or debt and equity investments.

Offsetting the new production were repayments which included normal amortization and paydowns on revolvers of $15.2 million. This includes three early payoffs at par totaling a combined $8.3 million during the quarter for which we received $200,000 in prepayment fees.

Additionally, we received $800,000 of success fees during the three months ended June 30, 2012 generated from an exit of a proprietary investment earlier in fiscal year 2012. This brings our success fee earnings total during fiscal year 2012 up to $2.8 million or approximately $0.13 per common share for the nine months ended June 30, 2012. And we will discuss our successes in more detail later on in the call.

We funded this net increase in production from operating income and draws on our credit facility which matures in January 2015. Subsequent to quarter end, we had an early payoff of one proprietary investment totaling $12.6 million for which we received an additional $1.2 million in success fees. Furthermore, we invested $300,000 in three existing portfolio companies and have received $500,000 in repayments.

In addition, we received approval in July 2012 from the Securities and Exchange Commission to co-invest with certain affiliated investment funds, including Gladstone Investment Corporation, subject to certain conditions, which we believe will enhance our ability to further our investment strategy and objectives.

We continue to be optimistic about our pipeline for new deals over the next several quarters. We are still seeing solid investment opportunities in an improving marketplace which are aligned with our investment strategy and objectives, although there seems to be a good deal of capital and competition in the market for the most attractive deals. We were able to access the long-term capital market in November of '11 by raising $38.5 million in term preferred stock and 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.

We continue to assess other long-term capital markets to raise further capital to grow the portfolio. At the end of our third quarter, we eight portfolio companies either fully or partially on nonaccrual status. We added the remaining revolver in senior term debt of Sunshine Media Holdings to nonaccrual status effective April 1, 2012, based on the Company's performance and increase in the length of time projected for them to execute their business plan. We remain focused on managing our current portfolio so we can decrease the number of companies on nonaccrual either through sales or restructures over the next several quarters. The investments classified as non-accruing had a cost basis of $62.4 million or about 16.3% of the cost basis of all net investments in our portfolio as of June 30, 2012. From a fair value perspective, the nonaccruals fair value represents $5.3 million or about 1.9% of the fair value basis for all debt investments in the portfolio at quarter end.

When seek to mitigate our interest rate risk by having a high concentration of variable rate loans in the portfolio so when rates do begin to increase, we should have higher income. And while our loan rates are variable, they usually have a minimum weight or a floor, so the effects of declining interest rates are mitigated.

We target to have a large part of our portfolio in variable rate accompanied with these minimum floors with the remainder of the portfolio being at fixed rates. For the quarter ended June 30, approximately 88% of our loans at cost have floors, 6% of our loans do not have floors or ceilings, and the remaining 6% of our loans have relatively high fixed rates.

The weighted average floor at our variable rate loan is 2.4% in relation to one-month LIBOR, with an average margin of 8.9%, resulting in all-in average weight of 11.3%, our income producing investments.

The quality of our income continues to be good. We generally limit income generated from paid in kind or original issued 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 would be paying out cash and distributions on non-cash income. As of September 30, 2011, we had no investments that bore PIK income and we had minimal PIK income during the three and nine months ended June 30, 2012.

We recorded OID income in the third quarter of 2012 of $100,000, which is consistent with our prior quarters. Success fees are contractually due upon a change of control of a portfolio company, and generally through a sale of that company and are really not recognized until they are received in cash. We've known success fees of $800,000 during the quarter ended June 30, 2012, and $2.8 million for the entire first nine months of fiscal year 2012 from exits of certain portfolio companies. And we don't include success fees in our reported yields that are not consistent and would skew our actual current cash run rate.

As of June 30, 2012, approximately 35.4% of our interest bearing debt investments have success fees related to them. And those have an average contractual accrual rate of 2.5% per annum on the principal balances.

As of June 30, 2012, we had current contractual obligations of an aggregate of $12.8 million in success fees on our accruing debt investments. We have not recorded this contingent income on our balance sheet per US Generally Accepted Accounting Principles. We hope these will show up in the future earnings. There are no guarantees that we will be able to collect all these success fees or know the timing of such collections due to their contingent nature.

As far as the marketplace, the senior and senior subordinated debt marketplace for larger middle market companies continues to improve, albeit inconsistently. We believe there are encouraging economic trends in this market place coupled with some decent liquidity.

Market for loans to companies at the low end of the middle market in which we seek to invest our capital is seeing more competition but again not really from banks. Competition is generally coming from other public funds like ours, and many small private funds.

Our new proprietary deal pipeline continues to be good. We hope to show you some more quality investment additions to the Gladstone Capital portfolio over the next several quarters.

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

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

Good morning everyone. Yesterday, we released our third fiscal quarter earnings press release and Form 10-Q which I hope you've had a chance to review. On this call, I will cover some of our financial highlights, and I will start with the income statement.

For our third quarter ended June 30, 2012, net investment income was $4.9 million versus $4.5 million for the same quarter last year, which was an increase of 7.4%. This increase was primarily due to an increase in interest in other investment income of $1 million. Interest income increased by $0.5 million, or 5.2%, during the three months ended June 30, 2012 as compared to the prior-year period. This was due to an increase in the overall portfolio size and an increase in the weighted average yield as compared to the prior-year period.

The annualized weighted average yield on our interest-bearing debt investments, or accruing debt investments, was a 11.3% for the third quarter of 2012 as compared to 10.8% for the third quarter of 2011. The increase in the yield of our accruing debt investments is primarily due to the addition of new high-yielding proprietary investments subsequent to June 30, 2011, the early payoff of some of our syndicate loans that generally bear lower interest rates, and, finally, the placement of certain loans on non-accrual that had lower interest rates.

Other investment income totaled $1 million for the three months ending June 30, 2012, an increase of approximately 120% over the prior-year period and consisted primarily of success fees of $800,000 from an early payoff at par of a proprietary investment earlier in 2012. Partially offsetting these increases to net investment income were increases of $0.9 million in aggregate of interest and dividend expense due to increased borrowings under the credit facility and payment of $0.7 million in term preferred dividends during the three months ended June 30, 2012.

Our weighted average borrowings increased during the three months ended June 30, 2012 by $17.2 million over the prior-year period. For the nine months ended June 30, 2012, net investment income was $14.5 million versus $13.6 million for the same period last year, an increase of 6.6%. This was primarily due to an increase in the weighted average principal balance of our portfolio by $49 million, or 17.6% when compared to the prior-year period.

Partially offsetting these increases to net investment income was an increase of $3.8 million in aggregate of interest and dividend expense, due to the same reasons described for the three-month period. On a weighted average common share basis, net investment income for the current quarter was $0.23 per share compared to $0.22 for the quarter ended June 30, 2011.

Net investment income per weighted average common share for the nine months ended June 30, 2012 was $0.69 per share compared to $0.65 per share for the nine-month period in the prior year. 100% of common and preferred stock distribution paid in the first three quarters of fiscal 2012 were covered by our net investment income. This highlights our commitment to prudent growth.

Let's turn to realized and unrealized changes in our assets. Realized gains and losses come from actual sales or disposals of investment. Unrealized appreciation and depreciation come from our requirement to market our investments to fair value on our balance sheet with the change in fair value from one period to the next recognized in our income statement. Unrealized appreciation and depreciation is a non-cash event.

Regarding our realized investment activity, we had minimal realized net gain activity for the third quarters of fiscal 2012 and 2011. For the nine months ended June 30, 2012, we had a net realized loss of $8.1 million which primarily resulted from the sales of [KMBT] Corporation and newer holdings during the first quarter ended December 31, 2011.

From and unrealized standpoint, for the June 2012 quarter end, we had net unrealized appreciation of $11.1 million over our entire portfolio. Our investment portfolio was valued at approximately $299 million versus a cost basis of $395 million, or approximately 76% of cost. This fair value to cost percentage is lower than last quarter, which was at 77%, resulting from continued declines in certain of our portfolio companies' financial and operational performance and the early payoff of some good loans. The cumulative net unrealized depreciation of our investments does not impact our current ability to pay distributions to stockholders but does indicate that the assessed value is lower and that there may be future realized losses that could alternately reduce our distributions.

Also during the quarter, we had another component of unrealized appreciation and depreciation, which related to the fair value of our credit facility. For the quarter ended June 30, 2012, we reported an unrealized appreciation of $4.5 million which decreases our net assets. This value was primarily based on estimates provided by an independent third party.

So 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 June 2012 quarter end, the net decrease in net assets resulting from operations decreased to $10.6 million or $0.50 per common share versus $14.3 million or $0.68 per common share in the prior year's June quarter. The year-over-year change is primarily due to the $18.8 million in net unrealized depreciation recorded in the third quarter of 2011 on our investments.

For the nine months ended June 30, 2012, the net decrease in net assets resulting from operations decreased to $13.5 million or $0.64 per common share versus $20.6 million or $0.98 per common share in the prior year's period. The year-over-year change is primarily due to the $35.1 million in unrealized appreciation recorded in the nine months ended June 30, 2011 on our investments.

Moving over to the balance sheet, as of June 30, the third quarter of our fiscal year, we had approximately $322 million in total assets at fair value consisting of $299 million in investments at fair value and $23 million in cash and other assets. Our borrowings totaled $87.3 million at cost on our line of credit and $38.5 million in our 7.125% series 2016 term preferred stock which was issued in November of 2011. Due to the term preferred stocks' mandatory redemption feature, we classified the preferred stock as a liability on our balance sheet.

For the quarter ended June 30, 2012, we had approximately $187 million in net assets as compared to $214 million in net assets as of our fiscal year ended September 30, 2011. This represents an NAV per common share of $8.91 as of June 30, 2012 as compared to $10.16 as of September 30, 2011.

At the time of this call, we have about $49.1 million available on our $137 million line of credit and we have $8.4 million in cash. So we have the ability to deploy more capital for the right opportunities in line with our investment objectives and strategies. And now I'll turn the program back to David.

Thanks David Watson. That was a good report. I hope all our listeners will read our press release and review our quarterly reports on Form 10-Q that we just filed with the SEC. You can access the press release, the 10-Q and other information on our website at www.GladstoneCapital.com and also on the SEC's website.

The big news this quarter of course is good production increase in the quarter, three new investments totaling $33 million. And these new investments are a good investment plus our good pipeline. We feel like we are moving in the right direction.

We did receive of course $800,000 in success fees from investments that paid off at par, which brings our total success fees for the fiscal year to $2.8 million. And after the quarter end of June 30, 2012, we successfully exited a proprietary deal for $12.6 million at par and got $1.2 million in success fees which will be reported of course more in detail in the September 30, 2012 discussion that we have late November, probably early December.

At these points, the good news for shareholders are very strong and I think we are on the right road today. Our biggest challenge today is our access to long-term debt markets, the debt marketplace. We have a line of credit, very supportive lending institutions and the line of credit is working fine and we believe it's sufficient for the near term. November 2011 we issued some new term preferred stock as a substitute for long-term debt. In order to make a lot of new long-term investments, we will need to raise additional long-term debt, long-term capital such as the issuance of our term preferred stock and perhaps even common stock.

For our portfolio companies, we also worry that they are not able to get long-term senior loans at reasonable rates. There are fair number of regional banks making new loans based primarily on the assets of the business. These asset-based lenders are certainly more plentiful today than they have been in the last few years. And we hope the banks will continue to extend long-term loans to our portfolio of companies. I think the banks will be better over the coming years, but we still have a lot to worry about. The economy is not strong. It's very weak today; it's slowing down, so we are all worried about that. Oil prices continue to be a risk for the economy. High gas prices hurt all the autos and trucks of all our businesses. We just need to develop much more gas and oil here in the United States.

Inflation is on the way; we all know that. The government keeps printing money. The only reason we have not seen a lot of inflation or turmoil in the global marketplace is that people all over the world, because of that turmoil, are buying dollars, and that's been to the benefit of Americans. I don't know how long that will continue, but spending by the federal government is still unsustainable. The federal deficit is now $14 trillion and rising, which doesn't include a lot of off-balance-sheet social liability such as the $40 trillion we have in all of our social programs that we have. The government can't continue to print money. Now they are borrowing over 45% of every dollar to spend for the remaining 2012; it may even be as high as 50%.

The amount of all the money being spent on the war in Afghanistan still hurts the economy. Thank goodness it is winding down and we hope to see all of our troops coming home soon. They are the true heroes of this period in history. They have risked their lives for us and I hope every time you see a soldier in the airport or wherever, I hope you'll say hello and thank them for their courageous work.

And of course the government is talking about raising taxes. It'd just be another crushing blow on the economy. We know that we have a spending problem rather than a tax problem. I was just reading there are 144 million Americans today that are on some kind of government subsidy. We are reaching what I would consider a tipping point in that we have one person working for every one person that's not working and taking money from the government. So it's becoming a one-to-one ratio, and that always spells problems in companies as well as countries.

The trade deficit with China and certain other nations is extremely high, and certainly unsustainable. China continues to subsidize all their industries to the disadvantage of our businesses, subsidize their oil prices significantly. This means our companies can't compete with theirs, and so jobs leave the United States and go to Asia. The outsourcing of jobs is becoming -- our taxes -- making our taxes too high and regulations on business really insane. So, all of these outsourcing jobs are leaving simply because of too much regulation and too much taxes, and we've got to change that.

The continued downturn in the housing industry, although it seems to be coming to an end, there's still a lot of mortgages in default and continues to drag down our economy. That of course was one of the main reasons for the recession we're in. I am hopeful that something will come along and move that a little further along. Certainly, interest rates couldn't be any lower for those who are buying houses today.

European debt crisis may hurt some companies, but we really don't have any investments in Europe and our investments in US companies don't have that much contact with Europe, so we are not going to get hurt by that, but certainly some of our banks could be damaged by that. And of course, the all-important number, unemployment in the US is far too high. The numbers used by the government are those who are working part-time but seeking full-time work, and those people who have stopped looking for work are not counted as well. So a more realistic number, at least the one that we used to use for unemployment, is somewhere between 15% and 18% these days.

In spite of all of those negatives, the industrial base of the US, what's left of it, is not a disaster. There is a lingering recession out there. It's having an impact on our portfolio of companies, but not the disaster it was a few years ago. Like most companies, some of our portfolio companies have not seen any increases in revenue or in their backlogs. However, others are seeing good increases and a few of them in the portfolio are just seeing very dramatic increases. So it's a very uneven economy we are in today.

We all believe the downturn that began in 2008 has reached bottom. I know there is a chance of the economy slipping into a slight recession, but I don't think it's going to be anything like it was in the past. But it still seems to be improving even though it's relatively poor today.

In July 2012, the Board declared a dividend for monthly distributions of our common shares of $0.07 per common share for each of the months of July, August and September. Obviously, they have paid out the July one and August one will come out soon. The Board meets again in October to vote on the monthly distributions for October, November, and December 2012.

At the current distribution rate for our common stock with the common stock price trading as it closed yesterday at $8.04, the yield on the distribution now is extremely high at 10.44%. It's a wonderful company. To be able to get 10% or more on our stock is kind of unbelievable, but that's what the number is.

Our monthly distribution of 7.125% on our current preferred shares translates into $1.78 annually, so the term preferred was closing marketplace yesterday at $25.50. And that's just below a 7% yield. Obviously there's no upside on the dividend. It's not going to be increased, but at the same time it's very strong coverage ratio, the earnings that we have.

So please go to our website, www.GladstoneCapital.com, sign up for e-mail notifications. We're sending out good news about your Company these days and not any junk mail. Also, you can find us on Facebook under the Gladstone Companies, and you can follow us on Twitter under Gladstone Comps.

I think we are moving forward at a good pace now. I hope we have some progress again for the fiscal year ended 2013. And 2012 looks like it's wrapping up as a really good year.

As far as we can see, the US economy is going through a slow period. It's fallen back a bit, but we think the economy has reached bottom and we are worried about it, of course, but I think we are going to be okay during the next 12 months.

We are stewards of your money, so we will stay the course and continue to be conservative and disciplined in our investment approach while striving to deliver some shareholder value on your investments as well as in the Company dividend.

All right, if Amy will come on now, let's open up the lines to analysts and shareholders who want to ask us some questions.

(Operator Instructions). Troy Ward, Stifel Nicolaus.

Thank you and good morning gentlemen. David, real quick. The coinvestment order from the SEC, can you give us a little bit of color on how you believe you can use that at GLAD to better the performance?

Sure. As many of you know, we had an order from the SEC some time ago that allowed us to co-invest with other entities, but not with Gladstone Investment or some of the other public companies. And this time we went in and asked the SEC if they would let the two public traded BDCs co-invest along with some others that we are contemplating. And as a result, where there is an overlap in goals and objectives of the two companies where there is a company that fits both of those objectives and strategies, then we could co-invest and probably will co-invest. And what that will do is give us an opportunity to do some transactions that are larger than we would normally do because it would be split between the two companies. So there's a little bit of extra opportunity there. It was just something we thought we should go ahead and do and we'll just see how it works out.

Great. Then in the June quarter, I guess I was a little bit surprised to see an investment in -- what was it POP Radio I think was the name of it. Historically, you've been in some very difficult industries that have gone through some change with media, publishing, and broadcasting. As you look at the portfolio today, are you specifically looking to add in specific industries like radio, or conversely are there some places where you won't to invest, because you feel like you have enough exposure?

Chip is going to take this one.

The name is misleading. It's not a radio business. The Company has contracts nationally with grocery stores and the CVSs of the world in order to pipe in music and advertising in products that are primarily carried in those stores, and they have a substantial market share, exceeding 90% and want long-term contracts with those locations. And so it's really not a radio business. We were obviously sensitive to the fact that it's an advertising-driven business. It held up very well during the downturn and the Company has a really high value add to advertisers that's demonstrated at the checkout counter. We thought it was a good investment. We did it with a very strong equity firm that knows this industry. So again, the name is a little misleading. It's not a radio business. And we are not concentrating on adding any additional radio to the portfolio.

Great, thanks Chip. Then moving into a little bit of credit quality, the nonaccrual bucket, as everybody knows, has increased pretty significantly in the quarter and year-to-date. Chip said it's 16% of all the investments, I think you said around nonaccrual. One of our biggest concerns as we look at this nonaccrual bucket is they're marked at just $0.08 on the dollar, 8% of original cost. It's been our experience that when you see this level of deterioration, it's pretty rare that we see any significant recovery of this value. Can you speak a little bit, David, about your -- that bucket and how you plan to recapture some of that $50-plus million that's been written down?

Sure. Over time, we've been pretty good at doing workouts. The recession has taken these workouts a longer period of time than we've anticipated, and we've seen some pretty strange things go on in the marketplace. But we do have pretty good record of recovery. I think when we reach a point in time when Standard & Poor's and our other methodology for valuing these is pretty brutal on anything that comes along, and I have noticed that the depreciation that we have been recognizing seems to be much higher than we would have seen in other companies that I have run, as well as some of our competition. I don't throw cold water on anybody else's valuations, but I do say that we are being extremely conservative when you take a company that for whatever reason misses a couple of quarters and doesn't make what it's supposed to make, and you see the risk rating go down as well as the valuation go down by 50% or 60%. It's a bit harsh. I know we will recover some if not all on some of these, and we'll just have to see. I don't want to make any promises, but I think we will be just fine.

Just a bit more color there, because when I think of the valuation, I get that on something that's still accruing. But how would the valuation cause something to go on nonaccrual? Do you hear what I'm saying? It would seem like to me these are -- experience real stress if they are on nonaccrual and it's not just a mark.

It's both, and obviously a company's performance causes the markdown as well as values in the marketplace will cause it to go down. So it's both. And we've seen some pretty significant changes in the marketplace as well as in our portfolio. So I can't -- I'm not going to go into each one of these that we've marked down, but it is a significant markdown.

For example, a company that temporarily is not making money, that is they are actually losing some money, we have typically marked those at zero. And I think we could sell those for something. The question is what. And it's better for us to mark them down and be extremely conservative than it would be for us to try to set them at some value that we think someone who is a good turnaround artist would come in and pay that in order to get the company, because we do own the company most of the time in those cases.

So it's -- you'll see one of the companies coming along. I don't know what we will sell it for that went through the wringer, and hopefully in the next six months that gets sold and we'll just see how good our workout group is.

Great, thanks. I've got another question, but I'll get back in the queue behind some others. Thanks.

[Lee Carter], Private Investor.

David, your book is, what, 75% or 77% of original investments? Is part of that markdown from those bonds that you bought that didn't have a base on them?

No, that's not part of it. What you're referring to is some old syndicated loans that we had that we had to sell at a pretty good discount. Some of it is based on the equity ownership that we have in some of these companies that we markdown pretty severely when a company is in turnaround mode, usually to zero. So it's an overall analysis. And again, I think, if you give us a couple of more quarters, we'll show you that some of those are coming back pretty strong. It's just a painful period of time when the economy is down so bad and folks are wondering which way things are going. Are we going back into a recession, or are we going to climb back out of this? So at this point in time, it's just a rugged period for us to get through with some of our companies.

So what you are saying is, on the workouts, we probably could see in the next two or three quarters an increase in book value.

I think so. I think you'll see some appreciation there, and we are also putting on some new deals on the portfolio -- in the portfolio, and those are performing. The new ones that we put on are performing reasonably well. It's an unsettling period of time, but at the same time we've got some awfully good entrepreneurs. And as some people know, we often will replace a management team that's not performing with a new management team. And that usually takes another year after they arrive before they can get their hands around it. And we have seen a couple of companies that we've replaced the management team with very significant changes at the company and growth in the company. And who knows? We may put a couple of these over the next year on -- back on accrual. We'll just have to see what happens.

Thank you.

You're welcome. Next question please.

(Operator Instructions). Troy Ward, Stifel Nicolaus.

Hey David, I wanted to hop back in the queue. This final question may be a bit uncomfortable, but I genuinely would like your view on it. Your investment performance, quite honestly, has been near the bottom of the BDC sector for return on equity for both the three-year and the five-year time frame. Given the considerable credit issues that you are still facing in the portfolio, your near-term ROE probably isn't going to turn significantly positive in the near term as well. Have you considered making any significant changes to the business model, either changes in personnel or even evaluating strategic alternatives to address this underperformance?

No. As you know, our underperformance was damaged significantly during the last five, and even for the three-year period, by our friends at Deutsche Bank who didn't renew our line. We had to sell off a whole portfolio of loans and take significant losses. And what happens in those cases, as you well know, is that you have to sell off your extremely good loans; those are the only ones you can sell in a big downturn. And as a result of selling those off, I almost cry sometimes knowing that all of those loans paid off in full and performed admirably after we sold them off. But we are now taking those loans that we have left and the new ones that we are putting on the books, and my guess is that, next year this time, or certainly for the year ending 2013, we'll see some real progress in the portfolio. So while we are at the bottom of the list, as you say it, in terms of return on equity, we have maintained the dividend since our demise under Deutsche Bank's rule. And I think you'll see the dividend continue to strengthen and go forward.

Great, I appreciate the color, David. Thank you.

J.T. Rogers, Janney Capital Markets.

Good morning David. Just had a question on what kind of leverage levels you all are comfortable with, other company levels. It seems like you have adequate availability under the line of credit. Just wondering how levered you would be comfortable, what kind of leverage you would be willing to take Gladstone Capital to?

That's always one we debate every day. I think you'll see us put a few more deals on the books, and then we'll have to look at the marketplace to see what we want to do. We are getting a lot of leverage going these days, and I don't know how much more -- how much more room, David Watson, do we have on the line? You mentioned it before.

$49 million.

So we've got $49 million. If we use that in co-investments with Gladstone Investments, you can probably do around $100 million worth of transactions. So unless chip gets really busy, that's probably going to last us for two or three quarters in putting new deals on the books. So, we will just have to see how it works out as time goes on. The marketplace may change. Certainly, interest rates have come down dramatically, and we are hoping that we can qualify for some lower interest rate loans and maybe even some additional preferred stock. We just have to look at the numbers before we make any of those judgments.

Great. Then when you get to that in the next two or three quarters, and sort of hit a -- looking at 0.7 or 0.8 times debt to equity, what would -- what is your thought process there? Is it would you consider raising equity at these prices, or would you slow down your origination effort?

There's two things going on. First of all, as you know, we can lever it to one-to-one. So for every equity dollar we have, we can either borrow or have preferred stock. By the way, there is a bill in Congress to eliminate preferred stock in that computation. I have no idea whether those guys will approve it or not.

But the point -- the second point that I want to make is that some of our lower interest rate loans have been paying off. And those loans, as that money comes back in, are put into higher yielding loans. So while we only have $49 million under the line of credit, we may see payoffs in the next six months at a very high rate and as a result, be able to put that money to work at a better price. So, there's two things going on. There's a transition in the portfolio as well as a change in what's going on in the marketplace.

All right, thanks a lot.

Casey Alexander, Gilford Securities.

Good morning. This is a follow-up to Troy's last question. The last eight quarters have seen close to a $3 decline in NAV, and that is subsequent to the so-called Deutsche Bank event. At the same point in time that investors have experienced a $3 decline in NAV, through the nine months, you guys have taken $3.5 million in incentive fees while you're marking down book value eight straight quarters in a row. Are you sure that, for the benefit of investors, since you've almost entirely missed an underwriting cycle here from the origination standpoint, virtually the vast majority of the money that you have put to work have been in syndicated loans that you've purchased, shouldn't you really be seriously considering reevaluating this business model?

First of all, let's go back and rewind and take a look at that. The $3 in NAV that you're marking to is the loans that were left over after we sold off the really good loans. So, we were left with less desirable loans. That's the first point.

The second point is I think the loans that we are putting on the books are really good ones, and we have gone slow because we do have workouts. And second of all we have given back a lot of the incentive fee. And so I don't know of -- I've asked this question of several people that have seen company's performance, and the incentive fee give back that we have done over the years has been unusual. I only know of two BDCs that have ever given back any of their incentive fee, and that's been our two BDCs.

So yes, we are not excited about the fact that we have had some problems over the last three years, but I wouldn't ascribe it all to mismanagement or the business model. The deals that we put on the books with the money that you talk about in syndicated loans has been there as a marker because we were doing workouts. And we didn't want to take that money and try to do two things at once.

So, at this point in time, the goal is to fix the deals that we've got and continue to add to the portfolio and continue to pay $0.07 and hopefully this year we will have a little extra. And next year, maybe we'll get a little extra beyond that. So just have to work with us during this period of time. I'm sorry you're unhappy with it.

Let me ask a question of Chip. The portfolio is marked at $298 versus a $394 million cost. What would you calculate real realizable par value of the portfolio is now? It's certainly not cost. What do you think a realizable par value is at this point in time based upon your judgment of the portfolio?

As you know, we have our portfolio mostly valued by a third- arty, and we may not always agree with what we think that individual portfolio company is valued at. However, in general, I don't think we have enough data to doubt an independent third-party of their stature and value. So I wouldn't steer from the value that we -- where we value the portfolio today. One of our efforts is always to try to work on these companies to do better than they are currently valued if we end up in a negative situation. So that changes day to day with the ability for us to maneuver within these companies, improve them operationally, find acquirers who are interested in the business. So those are the efforts we are working on over the next several quarters to improve those numbers.

The valuation model that we use I would say is conservative. That may be not what everybody would like to see, but it's the number that we have to put in the prospectus and trying to guess or give you any other number would be illegal. The SEC would -- if we are saying one thing in our financial statements and another thing to the marketplace through calls like this, I think they would probably lock us up.

Okay, thank you.

There are no further questions in the queue. I'd like to turn the conference back over to Mr. Gladstone for any closing remarks.

We thank you very much and we're looking forward to the year ahead. We feel comfortable with our dividend strategy that we have today. We are certainly earning the dividend. We have cash coming in in that amount. And I think you will see that the next year will be a lot brighter than the past three years. And hopefully, all of us have a good meeting in late November, early December on the end of the year. That's the end of this conference call.

The conference has now concluded. Thank you for attending today's presentation. Please disconnect your lines.