Gladstone Capital Corp (GLAD) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gladstone Capital Corporation third-quarter earnings call and webcast. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the call over to David Gladstone. Sir, you may begin.

All right. Thank you, Destiny, for that nice introduction and hello everyone out there. This is David Gladstone, Chairman, with the quarterly earnings conference call for shareholders and for our analysts. And this is the call for Gladstone Capital. The common stock is traded on NASDAQ under GLAD and the preferred stock is traded under the symbol GLADO.

Thank you all for calling in. We love to have these calls; happy time to talk to shareholders and wish we could do this more often. We like to give updates on our company and our portfolio of companies, the business environment.

And as always, you have an invitation, it's open, to come by and visit us anytime here in McLean, Virginia. We are just outside of Washington, DC. Stop by and say hello. We have a lot of folks here and I think you'll see some of the best folks in the business.

Now a word or two from our General Counsel and Secretary, Michael LiCalsi. He is also President of our administrator and he has some important information for everyone listening to the summary presentation. Michael?

Good morning, everyone. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the Company. These forward-looking statements inherently involve certain risks and uncertainties and other factors, even though they are based on our current plans, which we believe to be reasonable.

Many of these forward-looking statements can be identified by the use of certain words such as anticipate, 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 filing and our registration statement as filed with the SEC, all of which can be found on our website at www.GladstoneCapital.com or the SEC's 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 except as required by law. Please note that past performance or market information is not a guarantee of future results.

Please take the opportunity to visit our website, www.GladstoneCapital.com, and sign up for our email notification service. We don't send out junk mail, just timely news on your company. You can also find us on Facebook, keyword The Gladstone Companies, and follow us on Twitter @GladstoneComps.

I hope our listeners will read our press release issued yesterday and also review our Form 10-Q for a third quarter ended June 30, 2014. Again, filed yesterday with the SEC. You can access this press release and the 10-Q on our website, www.GladstoneCapital.com, and also on the SEC's website at www.SEC.gov. This presentation is also on our website.

And now we will begin with hearing from Gladstone Capital's President, Bob Marcotte.

Thank you, Michael, and good morning, everyone. Let's begin by reviewing Gladstone Capital's portfolio activity for the quarter, any significant changes in the portfolio credits, portfolio income profile, and then conclude with an update on the investment climate and marketplace in which we operate.

As many of you know, we provide loans to privately-held US-based businesses and target companies in the lower middle market with $20 million to $100 million of revenue and $3 million to $15 million of earnings before interest, taxes, and depreciation. Providing capital to these companies allows them to grow, make acquisitions of other companies, and may be used to refinance existing debts. We invest in companies with profitable operations, sustainable competitive positions, and experienced management teams using a combination of senior or subordinated loans and sometimes a small amount of equity.

With respect to investment activity, during the quarter ended June 30, 2014, we made $3.4 million in either follow-on or new syndicated financings and had three early payoffs at par aggregating $5.4 million, which produced $500,000 in exit fees. In terms of our direct origination activities, three of the awarded investments targeted to close during the quarter were delayed beyond the end of the quarter. Subsequent to June 30 we closed $7.1 million follow-on subordinated debt investment in Francis Drilling Fluids, a private equity-backed company to fund a strategic acquisition which enhances the core oil and gas service operations and provides it with increased scale.

The two other awarded transactions which aggregate $16.3 million are late in the documentation process and are anticipated to close shortly. While we are disappointed with this production slippage, we are approaching the elevated risk levels in the market cautiously and are encouraged by the recent deal awards that have validated our investment offerings and should support a better pacing of our investment production into the current quarter and beyond.

With respect to the quality of the portfolio, on the whole the portfolio valuation was down quarter over quarter, due almost entirely to declining enterprise values on three deals. These declines were only partially offset by incremental improvement in performance and comparable multiples for several smaller investments.

As of June 30, 2014, we had a net increase of $22.8 million in unrealized depreciation from last quarter, bringing the cumulative unrealized appreciation to $85.3 million. The biggest contributors to the net unrealized depreciation for the quarter were valuations related to RBC acquisition, also known as Reliable, and Midwest Metal Distributors.

With respect to Reliable, it is a manufacturer of active pharmaceutical ingredients, or APIs, and high purity ingredients for generic drug manufacturers. In the case of APIs, the Company is intimately involved in the FDA drug approval process and, as a result, has significant contractual protections to support these development efforts.

Within the past quarter, one of Reliable's key customers communicated their intent to exercise a contract option that may alter the timing of future revenue and cash flows to the Company. Pending further clarity from this customer, which is expected shortly, we have adjusted our valuation consistent with the existing operations forecast and cash flows, as well as commissioned an expert third-party strategic review of the Company's operations and to support any potential contractual adjustments that may come.

Midwest Metals is an aluminum service center, and despite strong sales performance and it being current on all loan obligations, the long-term downswing in aluminum prices have impacted the Company's margins and cash flow. In light of the current business outlook, scale, and competitive position, we have moved to adjust the valuation in line with prevailing enterprise valuations consistent with discussions with investment bankers and third-party inquiries.

Our investment in Sunshine Media Holdings remains on non-accrual and still a work in process, although, as reported last quarter, it has stabilized and is cash flow positive. Heartland Communications, a small radio broadcaster, was placed on non-accrual last quarter due to liquidity concerns and Midwest was placed on non-accrual this quarter. These three non-accrual companies have combined debt costs of approximately $52 million, or 16% of the cost basis of all debt investments in the portfolio, and a combined fair value of $13.6 million, or 5.6% of the fair value of all debt investments in the portfolio.

We remain diligently focused on managing these non-accrual investments to achieve sustainable profit levels that can support a market return on our investment positions or, as necessary, take alternative actions. We have had some success in turning several of our non-accruals around in the last year and were able to recover a meaningful portion of our capital from them. However, this does not mean that we can do it again or that we will not place other companies on non-accrual in the future.

With respect to the portfolio income profile, the weighted average yield on interest-bearing debt investments in our portfolio has remained consistent over the last several quarters and was 11.5% as of June 30, 2014, which excludes any success fee income. Inclusive of the success fees, our yield on the quarter would've been 12.6%. We continue to retain LIBOR floors on our (inaudible) investments and the weighted average floor on our variable rate loans was 2.1%, while the weighted average margin is 9.5%.

Our proprietary loans totaling approximately 80% of the total portfolio cost had an average all-in rate of 12%, while our syndicated loans totaling 20% of our portfolio at cost had an average all-in rate of 10.6%.

Looking at the quality of our portfolio income, our non-cash sources of income, which for us are original issue discount, or OID, and paid in kind, or PIK income, continue to be below our BDC peers and represent less than 1% of our investment income over the last several years. OID is typically associated with our syndicated investments and is accreted over the life of the loan and not reflected in the cash pay rates on our schedule of investments.

PIK income is recognized over the life of the loan and is not collected as cash, but is added to the printable balance to be collected at the maturity date. PIK rates are typically between 1% and 2% and currently we have 20 loans with OID and three loans with a partial PIK component.

Additionally, we have recognized a significant amount of non-interest income over the last several quarters, which is primarily due to what we call success fees, which are fees generally due on the change of control of a company and are recorded when received in cash. We have received success fees totaling $1.6 million over our entire fiscal year 2014 to date, in addition to a variety of other prepayments of distributions which Melissa will discuss later.

As of June 30, 2014, approximately 44% of our interest-bearing debt investments have success fee accruals. The weighted average accrual interest rate for our success fees is 2.4% per annum of the accruing principal balance. At quarter end we had off-balance-sheet success fees receivable of approximately $11 million, which equates to $0.53 per common share that would be owed us if payment was triggered.

Due to their contingent nature, there are no guarantees that we will be able to collect any of the success fees and, as such, we do not include them in our reported yields. In all, our total operating income on the quarter was up 9.1% from the prior quarter due to the increase in other income and we are expecting this elevated level of other income to continue into the fourth quarter. As of the date of the call, we had received $200,000 in other income due to two portfolio companies paying off subsequent to June 30 for a total cost basis of $5.4 million.

With respect to the backlog of loan opportunities and outlook, GLAD's deal pipeline and pipeline of loan opportunities is healthy. We continue to see heightened competitive pressure in the lending marketplace for senior and subordinated debt investments. This has resulted in yield compression for increasingly riskier, higher leveraged investments.

Competition is most pronounced at the larger end of the middle market, where the supply of capital from banks or BDCs seeking to grow assets and larger investment funds are outstripping leveraged finance demand. In spite of this increased competitive environment, we've been able to add seven new proprietary investments and six new syndicated investments since the beginning of our fiscal year, excluding any pending proprietary deals we hope to close within the next month.

While the investment climate is more challenging, we will continue to be selective and build our portfolio with sound investments in sustainable business with attractive risk-adjusted returns while maintaining our overall portfolio yields. We are focused on leveraging our established reputation in the lower end of the middle market and investor-oriented financing approach to more aggressively engage the private equity sponsor community as they are and represent a substantial portion of the potential investment opportunities in the lower middle market.

These constituents value the dedicated marketing focus, the level of engagement needed to understand their business, and are receptive to the uni-tranche financing solution we are able to deliver and generally welcome the opportunity to establish a long-term financial partnership.

Given the competitive syndicated loan market conditions including limited covenants, elevated leverage levels, and lower yields, we have not seen much in the way of attractively priced investments of late and do not expect these to be a significant part of our asset growth in the near term. The level of refinancing activity appears to have abated and our repayments are down 35% quarter over quarter in our portfolio, which reflects the extended period of lower interest rates and capital availability.

Our biggest focus going into the fourth quarter will be managing the more challenging credits in the portfolio referenced above and building on the new investment origination momentum to support future portfolio growth. We are actively working our portfolio challenge and are hopeful to be able to announce several resolutions in the coming quarter. Despite some of the broader investing market pressures, we continue to be optimistic that we are well-positioned to originate lower leverage, attractively-priced investments consistent with the lower end of the middle market, and we will generate solid asset income growth over the coming quarters to enhance the bottom line for the benefit of the shareholders.

And now we will turn it to our Chief Financial Officer, Melissa Morrison, who will [explore] the fund's financials for the quarter.

Thank you, Bob. Good morning, everyone. I will review GLAD's financial results and overall portfolio statistics for the quarter.

Starting with the statement of operations for our third fiscal quarter of 2014 ended June 30, 2014, as compared to our second fiscal quarter March 31, net investment income was $5.1 million, or $0.24 per share, which is an increase of 12.8% when compared to the prior quarter of $4.5 million, or $0.21 per share. Investment income increased quarter over quarter by 9.1%, primarily due to an increase in other income of $800,000 from increased success fees, dividend income, and other fees received during the three months ended June 30.

This quarter we received $500,000 in success fees from an early payoff at par of [Tebo Acquisition Company]; $700,000 in net distributions from FedCap Partners LLC; and $400,000 from a legal settlement related to a previously exited portfolio company. Interest income on debt investments remained consistent quarter over quarter at $8.2 million as we had two new deals funded at the end of the March quarter, offset by three investments paying off at par during this quarter totaling $5.4 million.

Offsetting the increase in investment income for the quarter was an increase in operating expenses of 5.7% as compared to the prior quarter, primarily due to the $300,000 increase in dividend expense on our mandatorily redeemable term preferred stock as a result of the increased number of shares of the new Series 2021 term preferred stock issued over the prior issue, albeit at a lower rate.

Of note, no incentive fee credit was needed during this quarter or last quarter, but we did credit the incentive fee for our first quarter ended December 31, 2013, in order to ensure that distributions to stockholders were covered entirely by net investment income, which they have been over the last three years. This highlights our continued commitment to prudent growth.

The low net investment income on our statement of operations are realized and unrealized changes in the fair value of our portfolio. Realized gains and losses come from actual sale or disposal transactions of our investment. When we mark investments to fair value on our statement of assets and liabilities, the change in fair value quarter over quarter is recognized in our statement of operations as unrealized appreciation or depreciation. This is a non-cash event and is required by Generally Accepted Accounting Principles in the US, or GAAP rules for investment companies.

During the quarter ended June 30 we recorded minimal realized activity on our portfolio. During this quarter we did record net unrealized depreciation of $22.8 million, which, as Bob touched on earlier, related to a decline in performance from certain portfolio companies and to a lesser extent a decrease in comparable multiples quarter over quarter. This decrease was only partially offset by unrealized appreciation on certain companies in the portfolio due to increased operational and financial performance and to a lesser extent an increase in certain comparable multiples.

Over our entire portfolio, excluding reversals, the net unrealized depreciation for the three months ended June 30 consisted of approximately $24.4 million of depreciation on our debt investments and $1.7 million of appreciation on our equity investments. Overall, our entire portfolio was fair valued at approximately 76% of cost as of June 30, which is down from 82% in the prior quarter and consistent with our fiscal year ended September 30, 2013.

The cumulative net unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders. However, it may be an indication of future realized losses which could ultimately reduce our income available for distribution to stockholders. The bottom line on our statement of operations is the change in net assets resulting from operations and is a combination of net investment income, net unrealized appreciation or depreciation, and net realized gains or losses.

For the June 30, 2014, quarter end the net decrease in net assets resulting from operations was $20.2 million, or $0.96 per share, versus a decrease of $2.1 million, or $0.10 per share, in the March 31, 2014, quarter end. The quarter-over-quarter decrease of $18.1 million, or $0.86 per share, is poorly driven by the larger net unrealized depreciation recorded this quarter as compared to the last quarter.

Now let's review GLAD's statement of assets and liabilities. As of June 30, 2014, we had approximately $283 million in total assets at fair value consisting of $265 million in investments at fair value and $18 million in cash and other assets. Liabilities totaled approximately $102 million consisting of $35 million in borrowings at cost on our line of credit which has a revolving period ending in January 2016, $61 million in term preferred stock which has a mandatory redemption feature at the end of 2021, and $5.9 million in other liabilities.

As noted earlier, in May of 2014 we completed a public offering of approximately 2.4 million shares of 6.75% Series 2021 term preferred stock at a public offering price of $25 per share. Net proceeds of the offering were approximately $58.5 million and were used to voluntarily redeem all outstanding shares of our 7.125% Series 2016 term preferred stock and to repay a portion of outstanding borrowings under our credit facility.

In connection with the voluntary redemption of our Series 2016 term preferred stock, we recognized a realized loss and extinguishment of $1.3 million on our statement of operations, which is primarily composed of the unamortized deferred issuance costs. We believe by refunding our term preferred stock we have enhanced our liquidity position, extended our maturity profile, and reduced the effective cost of our preferred to approximately 7.3%.

Overall, due to the increased depreciation on our investment portfolio, our net asset value decreased quarter over quarter from $206 million, or $9.79 per share, as of March 31 to $181 million, or $8.62 per share, as of June 30, 2014. This is up, however, from the NAV per share of $8.60 a year ago, June 30, 2013.

At the time of this call we have about $82 million in aggregate cash and availability on our $137 million credit facility. So we have enough capital to deploy for new originations while funding operating expenses and making distributions to stockholders.

In summary, we believe our balance sheet is conservative and that our overall risk profile is low. BDC rules restrict leverage to 1-to-1 debt to equity and currently GLAD's weighted average leverage is at 52%, which is relatively low as compared to our BDC peers.

We will need to consider other financing sources over the next several quarters depending on our new deal originations and available capital. Gladstone Capital is primarily a lending fund with a targeted portfolio mix of 95% in senior and senior subordinated debt securities and 5% in equity. Currently, our portfolio is adding [92 to 8%] allocation of debt-to-equity investments with 50% of the portfolio invested in senior debt and 42% in senior subordinated debt.

We ended the June 30 quarter with 49 companies in the portfolio, which is down slightly from 51 at the prior quarter end. The portfolio consisted of loans to 49 companies in 23 states and in 18 different industries. We continue to have a highly diversified portfolio by industry classification and by geographic region.

At fair value, our largest investment concentrations are in electronics, healthcare education and childcare, printing and publishing, and diversified manufacturing. Our five largest investments in our portfolio at fair value as of June 30 totaled $70 million, 26% of our total investment portfolio, which is consistent with last quarter. Our credit facility and regulations under the regulated investment company IRS rules both contain certain concentration and diversity limits, all of which we have met and continue to meet as of June 30.

We target to have our portfolio with 90% of debt investments at variable rates and 10% at fixed rates to help us manage interest rate risk and we are currently at 85% to 15% variable to fixed rate allocation. Our variable-rate loans, generally set to one-month LIBOR, usually have a minimum rate or floor so that the effect of declining interest rates are mitigated and when rates begin to increase we should see higher income.

In summary, we have limited origination activity this quarter with several deals slipping in to our fourth quarter ending September 30, 2014, and are hopeful that with recent momentum we can make up a portion of this shortfall in the current quarter. Our focus is on building our portfolio with investments in strong operating cash flow businesses and stable to growing industries. This will be necessary in order to grow our net investment income and show our shareholders accretive results in the future.

Now I will turn the call back over to David.

Thank you, Melissa. That was a good report. We've got good reports from Bob and Michael as well, so we are off to a good start for this new quarter.

For the quarter ending June 30, 2014, we improved the liquidity position by doing a public offering of $61 million in new Series 2021 term preferred stock and we have redeemed out our Series 2016 that was going to have to be redeemed out next year anyway. It also makes us very favorable to going forward negotiating our line of credit, which we will be doing during this year.

We maintain strong portfolio yield at about 11.5% quarter over quarter and we generated about $2 million of other income. All of these are good, strong movements as we were at about 116% coverage on our dividend in terms of income this quarter, so that's a good sign for all of these loans of stock.

One of our biggest challenges will be to continue to find new investments. You have heard Bob said that and I think the whole industry is saying that these days. There are a lot of capital providers out there, including BDCs and SBICs, which are bidding down the rate on loans to small businesses so we have to pick and choose very carefully.

Additionally, some of the banks have excess capital and are looking for loans, but I think we offer a much better return for those people who need us rather than the banks.

Many borrowers are looking to take advantage of the capital availability out there and rates by -- in the rates and they actively shop the financing, but most are not looking for just low rates. They are looking for a partner and I think we can help them succeed. We have a lot of successful people here that can add to any portfolio company.

So this is where we excel, where we bring more to the party than just a couple of percentage points changes in rates. And with all the business experience we have, the strong relationships we have with other financial sources, I think we bring a powerful package to each of the businesses that we look at.

We are hopeful that several of the deals that we are looking at this past quarter will progress along in funding in this current quarter. We will continue to focus on investments that we believe will survive any possible recession. The first-quarter decline in GDP for the United States gave us a real scare, but this new return, new GDP number looks like it's back up again.

We have some strong companies in the portfolio, but we would like not to test them with another recession today. We continue to avoid industries in the housing area, the banking industry, high technology, venture capital, commodity products or highly cyclical industries. We have done a few of those over the years and unless you catch the cycle just right you can get hurt.

We still worry that the available capital will be a concern in the near future as we utilize our current credit facility and look to raising additional long-term debt and equity capital as time goes on.

The recent economic indicators are 4% for GDP and that compares with the 2.1% negative that we had in the prior quarter, so that means we are averaging about 2%. Let's hope that that is okay and stays there. If it does, we can probably all muddle through.

But we continue to monitor the economic outlook which affects all of the investment climates, including those in which we operate. And we have those same concerns that I mentioned each time we watch the uncertainty around the Federal Reserve's monetary policy that can impact future interest rates. I personally don't believe there's going to be a lot of increase in interest rates, but one never knows.

Fiscal crisis and the federal government is still top of mind for all of us. The federal deficit is over $17 trillion and continues to climb as the government spends, and all of this is really unsustainable. At some point in time it has to stop.

Many private companies, like those in which we invest, see that there is much too much regulation in many areas. It's hindering their performance and expansion and job growth, and they cite over and over again healthcare, financial services, energy, environmental, emissions. All of those are hindering their ability to grow and create jobs.

And there are fewer small businesses today than there was in the recent past. In fact, some have estimated that we are back to 1974 in terms of creating new small businesses.

Despite the economic issues, our funds are in good stead these days, good history of earnings and paying our dividend through some very uncertain times. And I believe we will have the strength to weather any economic downturn that is thrown at us. We have very good banks that are supportive and so we don't look at that as a downer these days.

The strength we have is to continue to buy our stock. We need more stockholders to come in and buy our stock, obviously. I am one of the largest stockholders, maybe the largest, and I do love dividends, so we are hopeful that over the future we can find a way to increase the dividends.

At July 2014 our Board of Directors declared monthly distributions on the common stockholders at $0.07 per common share, and they also did little over $0.14 on the term preferred each of the months of July, August, and September. The Board will meet again in October to consider and vote upon the monthly distributions for October, November, and December.

Through the date of this call we have made about 129 sequential monthly cash distributions to our common shareholders and we did several quarters of distributional before we started the monthlies. At the current distributional rate of our common stock and with the common stock price now at about $10.02, we are yielding about 8.4%, which is a good, strong yield for such a strong company as ours.

Our monthly distribution of 6.75% for our newly-issued preferred stock translates into a little over $0.14 and that's going to give us a yield of about 6.5% with the stock trading at $26.03 as it was yesterday at the close. Both of those are in good shape these days.

In summary, this quarter we were able to report on successful capital offering resulting in liquidity positions and so we are much stronger than we were before that offering. And we will have to work to show you how new deal originations occurred in this quarter. Company team has a very successful track record of investing in middle market businesses and working together through multiple economic downturns, so I think we are in really good shape in this company.

Gladstone Capital continues to be very attractive investment opportunity. Total investment income was up. Net investment income was up. Net investment income per share was up over 14%, so we're in great shape these days.

I know it seems odd that the net asset value fell substantially this time, but I think that may be corrected next quarter. It could be if some things worked out with one or two of these portfolio companies.

Well, at this point, Destiny, would you come on and let's have some questions from those people out there in radio land.

(Operator Instructions) Troy Ward, KBW.

Great. Thank you and good morning, David and the rest of the team.

David, can you just back up? Your ending comments there, quite honestly, had me a little perplexed. You talk about how great everything is going and earnings are up and everything and then you recognize that book value was down 12% quarter over quarter. And then you kind of give the response that you think that can rebound.

What gives you the confidence that book value is going to rebound the buck and change that we lost this quarter?

Well, it was taken down primarily because of the uncertainties around one particular portfolio company and that was a big downer. We just did not -- we do not know even today exactly what's going to happen there, but we think we have a strong position. Bob, you want to chime in on that?

Sure. Troy, I have illuminated a little bit on Reliable being the biggest swing there. I think I can make a few statements.

First, we are very confident in the Company's contractual protections in the situation. The contract party we are dealing with, the counterparty is a very reputable and credit-worthy entity. The size of the market for the underlying drug is well-established.

The unknown at this point is the timing and structure of the contractual compensation that we feel the contract requires, and we expect clarity in the current quarter. So we are in a situation that we feel protected. We feel there is a resolution and a likely strong economic outcome.

But as it relates to pure valuation, it is impossible to determine until that has been concluded. So we have taken the tack to focus on what the business is doing today, and we would expect that contractual resolution to be something that we can report on -- report relatively soon and effectively address your questions of the potential recovery.

So, Troy, our whole approach to life has been to be much more conservative I think than some of our brethren in the business. Not to say that they are bad and we are good, it's just that we take as conservative approach as we can to net asset value. I don't want anybody to buy based on some larger net asset value.

How do you couch those statements with just the historical credit quality? We've known each other for a long time and it has always had a conservative tone, but the credit quality, quite honestly, hasn't followed.

If you look at your credit quality, realized losses versus peers it isn't more -- it isn't better than peers. How do you compare the actual performance to that statement?

I think it depends on which peers. If you choose the peers that came into the business after the recession, it's right. They didn't have to take the downer that we took.

If you will remember, we sold off an enormous amount of our really good loans in order to stay through the recession and paying Deutsche Bank, who didn't go forward with our renewal after telling us they were. So I think we have done very well and this quarter shows that we continue to peak up in terms of earnings. And net asset value is down, but who knows, next quarter it may rebound back by $18 million that we took it down by.

Stay tuned. All I can say is I feel comfortable today that we are going to earn the dividend and continue to grow the net investment income, but there are no guarantees in life, as you well know.

Okay. And then one last follow-up for Bob probably; more color on the Midwest Metals as well. Last quarter and again this quarter you referenced aluminum prices.

If we just look at the valuation -- I think you made a deal in 2010. At the end of 2012 you had it marked at $0.98 and just six months ago at the end of 2013 it was $0.99 of par. In the last six months aluminum prices have gone up 12% from $0.80 to $0.90.

Now we see the valuation of Midwest Metal went from $0.99 I think it's at -- I'm sorry, it went from 99% of par down to 14% of par this quarter. Can you again kind of correlate those statements with aluminum prices and why the valuation went down?

I think the only -- your comments with respect to aluminum prices, it's only in the last I believe less than 60 days that aluminum has moved up so we are obviously dealing with a long-term swing and the cumulative effects on earnings of the Company. And that is obviously going to be more reflective on the last 12 months performance, which we have to weigh as we think about valuations and consistencies across our portfolio.

That recent upswing in aluminum pricing, quite frankly, is a welcome relief and it's beginning to impact results. But obviously we are mindful of some of the operating and purchasing economies of scale in a business such as this. And as a result of that I think we have been more conservative in approaching where the valuations might be and mindful of strategic third-party discussions and approaches that have been had.

I will say we are also actively engaged in discussions to address this situation, but really can't comment beyond that. At this point I would say the cumulative effect of the down prices, the competitive profile, and the exit alternatives are baked into those numbers, but I will say it's also rebounded in the last month or two and it is improving. And, frankly, I think that helps our position and puts us in a much better stead to potentially see upside in that situation.

But we are basing it on the last 12 months performance and that is what is reflected in the valuation.

Okay, I think one interesting point would be Century Aluminum, CENX, reported today. It is a Midwest aluminum manufacturer and distributor, and the stock price has gone from $10 to $18 in the last six months. So it just continues to be a little bit perplexing why some of your investments seem to go opposite of the tone of management, and in this case, the opposite of what appears to be a pretty good comp and the marketplace.

With that I will --.

I think you have to look at -- that business is, I believe, a multibillion-dollar business. It's the largest distributor and service center in aluminum in the country. I think it speaks to the points that I've raised in terms of operating efficiencies, purchasing economies, and obviously there's a significant turn that happens in a business when the price outlook begins to shift.

But that is an equity valuation, that is not necessarily a trailing cash flow valuation and we are focused on the trailing -- the demonstrated cash flow valuation. And we are also dealing with a situation where we are not senior lender. We are a junior lender in this particular situation, as you can see from our schedule of investment, and there is, obviously, debt in this investment.

So until the cash flow absolutely is produced we can't look at what the outlook is likely to be in a business to determine what the value of our debt instrument is. So I agree with you --.

That's good color. That's good color. Thanks, Bob.

Okay. Can we have the next question, please?

(Operator Instructions) I am showing no questions at this time. I would like to turn the call back to David Gladstone for closing remarks.

All right, thank you all for calling in. We will see you next quarter and see if some of the things that we are hopeful to happen in this quarter happen, such as new transactions and revaluation of some of the ones that got hit this quarter.

Thank you all for calling in. That's the end of this conference call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.