Gladstone Capital Corp (GLAD) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Gladstone Capital Corporation's fourth quarter and year ended 9/30/2014 earnings conference call and webcast.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn this conference call to Mr. David Gladstone. You make begin, sir.

Alright, thank you Kevin. Nice introduction and hello and good morning to everyone this morning. This is David Gladstone, Chairman. This is the fourth-quarter and fiscal year-end earnings conference call. We do that for shareholders and analysts of Gladstone Capital. Common stock is traded out at the symbol GLAD and our preferred stock is traded under the symbol GLAD with an O at the end.

Again thank you all for calling in. We are always happy to talk to shareholders and analysts. Wish we did this more often, but it's once a quarter. We like giving updates on our Company, our portfolio and the business environment. As always we have an open invitation to visit us here in McLean, Virginia, which is outside Washington DC. Please stop by and say hello. You'll see some of the team, about 60 people. I think they are the finest in the business.

Now, we will hear from my General Counsel and Secretary Michael LiCalsi, he's also the President of our Administrator and he will make some statements regarding forward-looking statements. Michael?

Good morning, everyone. This conference call may include 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 such words 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 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 also note that past performance or market information is not a guarantee of any future results.

Please take the opportunity to visit our website and sign up for e-mail notification service. We don't send out junk mail, just timely news on the Company. You can also find us on Facebook with the keyword the Gladstone Companies, and follow us on twitter at Gladstone Comps.

I hope our listeners will read our press release issued yesterday and also review our Form 10-K for our year ended September 30, 2014, which we filed yesterday with the SEC. You can access the press release and 10-K on our website gladstonecapital.com and also on the SEC's website. An audio presentation of this call is also available on our website.

Now, we will begin by hearing from Gladstone Capital's President Bob Marcotte.

Good morning, everyone. Before we get into the performance review of our fourth quarter and fiscal year ended September 30, I'd like to provide a short overview of Gladstone Capital. As many of you know, Gladstone Capital is the lending of fund of the Gladstone Companies.

We provide loans to privately held, US-based businesses and target companies in the lower middle market, which we define as $20 million to $100 million in revenue and $3 million to $15 million in earnings before interest and taxes or EBITDA. We lend to businesses to fund private equity buyouts, make acquisitions, meet growth capital needs or to recapitalize or refinance their existing capital structure. We invest in companies with profitable operations, sustainable competitive positions in cash flows and experienced management teams.

Gladstone Capital is one of the few firms exclusively focused on cash flow lending to the lower middle market. We typically compete on the basis of our experience and ability to flex our investments to fit the needs and objectives of the business and not rate.

We invest in the combination of senior and subordinated securities and sometimes make a small equity co-investment, and target to make investments of $8 million to $20 million, but we'll consider smaller positions in broadly syndicated loans from time to time. Our investment focus is to make prudent investments, which provide accretive returns to our shareholders and support our commitment to maintain our long-standing track record of shareholder distributions.

Having set the stage for our business strategy, let's get into the results for the quarter and fiscal year ended September 30, in terms of investment activity, movements in the portfolio, credit quality, net investment income. Then, we'll conclude with an update on the market in which we operate.

During the quarter ended September 30, 2014 we made $18.9 million in either follow-on or new fundings and had five early payoffs totaling $15.9 million at cost. The payoffs produced a combined $230,000 in prepayment fees and $1.1 million in realized gains. In addition, we received $3.6 million during the quarter in scheduled and unscheduled repayments.

While the net investment growth on the quarter was flat, we view the $6.4 million of excess related to challenged assets, which were received in the quarter, as a significant positive, and we'll discuss later.

In terms of our direct origination activities for the quarter, we closed an $8.8 million investment in a senior subordinated term loan in a small equity co-investment to Southern Petroleum Laboratories Inc. At Southern Petroleum, or SPL, provides oil and gas production industry with independent lab measurement field meter services and provides well production allocation services across the Texas and the Gulf coast. The company's been operating for almost 75 years serving the oil and gas production market, and we supported two experienced sponsors in the buy to this family business.

Also included in our fundings for the quarter was the $7.1 million follow-on subordinated debt and equity co-investment in Francis Drilling Fluids. This investment was used to fund a strategic acquisition, which enhanced FDS core oil and gas service offerings, geographic coverage and scale.

Subsequent to September 30, we closed a $4 million follow-on investment in the Vitera Healthcare Solutions. The October of 2014 North American Aircraft Services was acquired and its debt and equity redeemed early, resulted in a realized gain of $1.6 million in a success fee of $600,000, which will be recorded in the December 2014 quarter. The IRR on this deal equated to 18%.

In November of 2014 we contracted the seller investment Midwest Metal Distribution for net proceeds which may exceed the fair value of the prior quarter end and would result in a realized loss of approximately $15 million. Additionally, we anticipate closing one small add-on and two syndicated transactions totaling approximately $11 million in the next few weeks.

For the year ended September 30, 2014 the Company closed $102 million of debt and equity investments, which was up 13.2% over last year. Repayments declined on the year to $67.9 million, resulting in a net portfolio growth, excluding exits, of $34 million. Our investment portfolio increased at cost and fair value by 5.1% and 9.5% respectively year over year. We expect this trend of building investment activity and modest repayment to continue over the near term and expect to fund it with our planned exit and increased utilization of our available credit facility.

With respect to the portfolio quality, on the whole, the portfolio valuation is up on the quarter and prior year with the fair value rising to 80.5% of cost at September 30, 2014 compared to 75.7% of cost at June 30, 2014 and 77.3% of cost at September 30, 2013. The net unrealized appreciation for the quarter end of September 30, 2014 totaled $17.3 million and was primarily due to the valuation increase related to our investment in RBC Acquisition also known as Reliable Biopharmaceutical.

Reliable, as we discussed in our last quarter's call is a manufacture of active pharmaceutical ingredients and high purity ingredients for generic drug manufacturers. Within the past quarter, the Company has been able to evidence tangible support for its ongoing contractual relationship with one of its key customers. For September 30 quarter, we [evalued] Reliable, with the support of an expert third-parties assistance, based on the current operations, forecast, cash flows of the business, and ongoing revenue streams from this key customer.

Despite some successes on the quarter, our nonaccrual investments and underperforming assets are still higher than we consider acceptable. All of these positions are in our older pre-2008 vintage investments and includes several small-scale businesses, which are relatively illiquid and take a longer plan to achieve an early exit. That said, we are placing more emphasis on the strategic assessment and fit of any investment positions and will continue to manage any outlier investments to our orderly exit.

This quarter we are pleased to report the exit of our investment in Junior Golf, which was paid off at par or $2.3 million higher than the payer value at June 30, 2014. This exit was achieved by a combination of contractual protections built into the investment and the skills and persistence of our team to manage the moving parts of these more challenged investments.

Our investment in Sunshine Media Holdings continues to be on a nonaccrual and is still a work in process. Although as I reported last quarter, it stabilized into cash flow positive, we are focused on trying to return some or all of this debt to accruing status in the near term.

Heartland communication, a small radio broadcaster, was placed on nonaccrual in the March 2014 quarter due to liquidity concerns. However, following a strong summer operating period, the company's managed to stay current on all interest payments as of today.

Subsequent to September 30 we contracted to exit Midwest Metals, which was placed on nonaccrual in the June quarter. The Midwest Metals closing is expected to occur in the next few weeks and the company continues to be in current on all interest obligations. These three nonaccrual companies have a combined debt cost basis of approximately $51.4 million or 16.1% of the cost basis of all debt investments in the portfolio and a combined fair value of $13.2 million or 5.2% of the fair value of all debt investments in the portfolio as of September 30.

Pro forma for the pending Midwest Metals exit, the fair value of the nonaccruals are expected to dip to $8.7 million or 3.4% of the fair value of all debt investments. We've had some success in turning around or exiting several other nonaccrual investments and more challenged credits in the last year with favorable results. However, this does not mean that we can do it again or that we will not place other companies on nonaccrual in the future.

Moving over to our portfolio income profile, the weighted average yield on our interest-bearing debt investments in our portfolio has remained relatively consistent over the last several quarters and was 11.6% as of September 30, 2014, which excludes any success fee income and reserves on interest receivable. Including success fees, our yield for the quarter ended September would have been 12.2%. Our eight new proprietary investments during the year ended September 30, 2014 had a weighted average, current interest rate 11.8%. Equally important from a risk perspective, the ongoing weighted average leverage in this deals was 3.2 turns of EBITDA.

Generally, our floating-rate investments have LIBOR floors and the weighted average on our comparable rate loans was 2.1%, while the weighted average margin is 9.4% as of September 30, 2014. Our proprietary loans, totaling 82% of the portfolio at cost, had an average all-in rate of 11.8% while our syndicates, totaling 18% of the portfolio at cost, had an average all-in rate of 10.5%.

Our other income has been significant at times of the last several quarters, which is primarily due to what we call success fees, which our fees generally do on the change of control of the company and recorded when cash is received. We have received success fees totaling $2.4 million during our FY14, in addition to a variety of other prepayment fees or distributions, which Melissa will discuss later. As of September 30, 2014 the off-balance-sheet success fees receivables totaled $11 million or approximately $0.52 per common share if the payment was triggered.

Due to their contingent nature, there are no guarantees that we will be able to collect any of these success fees and they are excluded from our reported yields.

Net investment income was down on the quarter over quarter, primarily due to the decrease in the amount of other income earned compared to the large amount recorded in the prior quarter. Our total operating income on the quarter was up significantly quarter over quarter due primarily to the reversal of the depreciation on Reliable from last quarter as previously discussed. As of the date of this call, we've received $640,000 in other income to the aforementioned portfolio company exit and early payoff subsequent to September 30 and expect other income in the next few quarters will be consistent with the level recorded this quarter.

With respect to the investment climate and backlog of loan opportunities -- now let's discuss the investment climate in which we operate. The middle-market M&A environment is relatively active. Transaction volumes are up over 2013 and building going to the end of the year. We are seeing a healthy flow of unit tranche investment opportunities in the lower end of the middle market across a variety of industries in middle-market private-equities sponsors.

While the opportunity flow is healthy, there's also a heightened competitive pressure in the lending market place for middle-market loans. The competitive convergence comes from a combination of banks, BDCs and other leverage credit funds. Certain of the regional and leveraged loan focused banks are looking to maintain yield or grow their loan book albeit with the overhang of some regulatory pressures.

The BDCs, and to a lesser extent other credit funds targeted to serve the senior loan market, are very active and has resulted in some yield compression for our increasingly riskier year, higher leveraged investments. Competition continues to be most pronounced at the higher end of the middle market, where the supply of capital is most abundant.

In spite of this increased competitive environment, we have been able to add eight new preparatory investments and five new syndicated investments through the year ended September 30, resulting in positive net earning asset growth while maintaining our average portfolio yield. While the investment climate is more challenging, our strategy is to continue to leverage our investment advisor's long standing reputation in the low end of the middle market and investor-oriented financing approach to more aggressively engage the private equity sponsor community as they represent a substantial portion of the potential investment opportunities in our lower middle markets.

These constituents value the dedicated market focus, the level of engagement needed to understand their business and our receptive to the uni-tranche financing solution we're able to deliver, and generally welcome the opportunity to establish a long-term financial partnership with us. Given the competitive syndicated market conditions, including limited covenants, elevated leverage levels and lower yields, we are seeing less attractively priced and syndicated investments of late. While we'd expect to maintain syndicated loans as a portion of our portfolio, we do not expect these to be a significant part of our asset growth for the near term.

Our continuing priorities going into 2015 will be to manage the more challenging credits in the portfolio and building on the new investment origination momentum to support fee for sure portfolio growth. Despite some of the broader investing market pressures, we continue to be optimistic that we're well positioned to originate lower leverage, attractively priced investment consistent with the lower end of the middle markets and we'll generate solid asset growth and income growth over the coming quarters to enhance the bottom line for the benefit of shareholders.

Now, let's hear from our Chief Financial Officer, Melissa Morrison, who will provide a report on the fund's quarterly and year-end results.

Thank you, Bob, and good morning, everyone. I will now review GLAD's financial results and overall portfolio statistics for the quarter and fiscal year end, starting with the statement of operations for our fourth fiscal quarter of 2014 ended September 30 as compared to our third fiscal quarter ended June 30, 2014.

Net investment income was $4.4 million or $0.21 per share, which is a decrease of 12.9% when compared to the prior quarter of $5.1 million or $0.24 per share. Investment income decreased quarter over quarter by 14.7% primarily due to the decrease in other income of $900,000 from higher dividend income and a litigation settlement received in the prior quarter. During the quarter ended September 30, we received $800,000 in success fees as a result of our earlier sales, as substantially all of the assets and remarked acquisition resulting from escrow proceeds during the 2014 fiscal year.

Interest income on debt investments decreased by 6.8% quarter over quarter primarily due to Midwest Metals being on nonaccrual the entire quarter, the five early payoffs we had during the quarter, and reserves placed on interest receivables for certain portfolio companies. Offsetting the decrease in investment income for the fourth quarter was a decrease in operating expenses of 16.5% as compared to the prior quarter, primarily due to the lower incentive fee and higher incentive fee credit in the current quarter.

Of note, we did receive interest payments of over $700,000 from two of our nonaccrual companies during our September 30 quarter end. These receipts were not recognized on the income statement, but as a cost basis reduction consistent with our nonaccrual policy. Based on our commitment to sustaining shareholder returns, we did credit the incentive fee in our fourth quarter ended September 30 in order to ensure that distributions to stockholders were covered by net investment income.

For the year ended September 30, our common stock distributions were covered by 104%, which is consistent with last year. For the 12 months ended September 30, 2014 net investment income remained consistent year over year at $18.4 million or $0.87 and $0.88 per share respectively.

The makeup of total investment income shifted slightly in that other income as a percentage of total investment income was up to 12% and 2014 as compared to 7% in 2013. Success fees were up year over year by $680,000 primarily related to the escrow release on LynMart. Prepayment and other fees and dividend income were up by $1.1 million in total year over year, primarily related to the litigation settlement of $425,000 we received in our third quarter on a previously exited portfolio company as well as the large dividend we received in our third quarter from FedCap Partners of $700,000.

Offsetting the increase in investment income during the year ended September 30 was the slight increase in expenses of 2.5% year over year. This increase was primarily due to increases in dividend expense on our mandatorily redeemable preferred stock and other expenses, which were partially offset by decreases in the interest expense on our credit facility, which related to a lower year-over-year weighted average outstanding amount and also the amendment in January 2013 to remove the LIBOR floor on advances.

The increase in dividend expense on our mandatorily redeemable term preferred resulted from the increased number of shares of the Series 2021 term-preferred stock issued in May 2014 over the prior issue, albeit at a lower rate. Other expenses increased year over year due to the receipt of certain previously reserved floor reimbursable deal expenses in the prior year as well as an increase in due diligence expenses on certain perspective portfolio companies in the current year.

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 investments. Unrealized depreciation or depreciation on our portfolio is when we mark investments to fair value on our statement of assets and liabilities and represents the change in fair value quarter over quarter in our statement of operations. 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 end of September 30, the majority of the $1.1 million of net realized gains was related to the exit of our equity investment and WP Evenflo during the quarter, above our cost basis. For the quarter ended September 30, we recorded net unrealized appreciation, excluding reversals, of $16 million on investments, which as Bob touched on earlier, primarily related to an increase in fair value on our investment in Reliable quarter over quarter.

In addition, we have several other portfolio companies with net unrealized depreciation during the quarter due to increases in comparable multiples as well as increased portfolio company performance. Over our entire portfolio, excluding reversals, the net unrealized appreciation for the three months ended September 30 consisted of approximately $10 million of appreciation on our debt investments and $6 million of appreciation on our equity investments.

Our 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.

Most of the older vintage investments in our portfolio and the industries they are in were severely impacted by the recession and in many cases they have not recovered. Approximately 92% of the $68 million in cumulative unrealized depreciation on our balance sheet relates to portfolio companies originated prior to 2008.

61% of the total cost basis of our portfolio is from investments that originated in the last seven years. As of September 30, those assets are valued at approximately 98% of their cost basis.

The bottom line on our statement of operations is the change in net access resulting from operations and is a combination of NII, net unrealized appreciation or depreciation, and net realized gains or losses. For the quarter ended September 30, 2014, the net increase in net assets resulting from operations was $23 million or $1.09 per share compared to a decrease of $20.2 million or $0.96 per share as of June 30. This significant increase quarter over quarter was primarily due to the aforementioned change in fair value of our investment in Reliable.

For the year ended September 30, the net increase in net assets resulting from operations was $11.2 million or $0.53 per share versus $32.2 million or $1.53 per share as of September 30, 2014. The year-over-year decrease of $21 million or $1.00 per share is primarily driven by the sale of LynMart in FY13, which resulted in a reversal of depreciation of $14 million or $0.67 per share in 2013.

The remaining difference is primarily attributable to the net unrealized depreciation recorded during 2014 on certain investments, namely Midwest Metals and Reliable, as compared to last year. Partially offset by appreciation on Defiance and Funko, during the year, totaling a combined $8.8 million, and reversals on sales of challenged assets totaling $6.4 million, which resulted from successful payoffs at higher than anticipated amounts.

Moving over to Gladstone Capital's statement of assets and liabilities. As of September 30, 2014 we had approximately $301 million in total assets at fair value consisting of $281 million in investment at fair value and $20 million in cash and other assets. Liabilities totaled approximately $102 million consisting of $36.7 million in borrowings at cost on our line of credit, which has a revolving period end date in January 2016, $61 million in term-preferred stock and $4.3 million in other liabilities.

We believe by refunding our term-preferred stock last quarter, we have enhanced our liquidity position, extended our maturity profile, and reduced the effective cost of our preferred to approximately 7.3%. In addition, we are looking at other capital raising opportunities in the future as well as working on an amendment and extension of our credit facility to lower our current cost of capital and more closely match the duration of our investments.

Overall, due to the increased appreciation of our investment portfolio quarter over quarter, our net asset value increased from $181 million or $8.62 per share as of June 30 to $200 million or $9.51 per share as of September 30, 2014. Our NAV per share of $9.51 is higher by 4% than last year's NAV of $9.14, when excluding the $0.67 per share impact from the LynMart sale last year.

From an available capital perspective, as of today, we have about $73 million in aggregate cash and availability on our $137 million credit facility. We have enough capital to deploy for new originations while funding operating expenses and making our monthly distributions to stockholders.

In summary, we believe our balance sheet is conservative. BDC rules restrict leverage to 1 to 1 debt to equity. Currently, GLAD's leverage is at about 50%, which is relatively low compared to our BDC peers where the median is around 69%. We will consider other financing sources over the next several quarters depending on meaningful production and available capital.

Now, I will comment on portfolio statistics. Gladstone Capital's targeted portfolio mix is 95% in senior and subordinated debt and 5% in equity securities. Currently our portfolio is at a 92% to 8% our allocation of debt to equity at cost, with 48% of the portfolio invested in senior debt and 44% in senior subordinated.

We ended the September 30 quarter with 45 companies in the portfolio, which is down from 49 at the prior quarter end. Our portfolio is highly diversified by industry classification, with 17 different industries and by geographic regions. At fair value, our largest investment concentrations are in healthcare, education and childcare, oil and gas, personal and nondurable consumer products, and diversified conglomerate manufacturing.

We continue to avoid industries in the housing, banking, high technologies and venture capital commodity products or highly cyclical industries. Our current non-syndicate average investment size is approximately $9.9 million. 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 September 30, 2014.

Our target for the portfolio is to have 90% of debt investments at variable rates and 10% at fixed rates to help us manage interest rate risk. We are currently at 85% to 15% variable to fixed rate allocation of the portfolio. Generally, our variable rate loans have a minimum rate or floor, so when rates begin to increase we should see higher income.

In summary, we had a total of $18.9 million in new and follow-on investments during our fourth quarter, maintaining our portfolio of yield and we maintained forward progress on addressing some of our challenged credit. Our focus is on building our portfolio with investments in strong operating cash flow businesses in stable to growing industries. This will be necessary in order to grow our net investment income and deliver accretive results to our shareholders in the future.

Now, I'll turn the call back over to David.

Alright. Thank you so much. Melissa, Bob, Michael, those are all good reports, like to see four more quarters of good reports like that.

For the quarter ending September 30, 2014, in summary, we had invested about $8.8 million in a new oil and gas company and we're excited about that company and another $7.1 million in existing oil and gas companies. We delivered solid exits above par and recognized other income and realize gains on these exits and with other income quarter totaled about $1.1 million. We've also maintained a strong portfolio yield of 11.6% quarter over quarter.

In addition, we have more investments that are in the line of getting closed. Hopefully, some of those will make it by December 31, 2014. Will be recording on those, of course, plus the others that are in the pipeline.

I just want to say this Company continues to fix the last few problem loans it has. I think the turnaround is coming on strong. I think we'll be over it soon.

Let me ask a question of all of those who follow the business development companies. There are many BDCs out there and would you rather have a stock in a BDC like GLAD that's trading below net asset value and every quarter continues to make a strong upside potential possible? Or, would you rather have the stock of a BDC that's trading above net asset value, has exhausted all its low-cost money from the FDA and has grown in size so that now has to invest in very large companies and compete with hundreds of other investors for those sized deals?

I ask you to take a close look at this fund. I think it's on the way to be a very good strong year for September 30, 2015.

One of our challenges, like everybody else in this business, is finding new investments in the competitive lending environment that we're all in. This Company is lending to smaller companies, so there's less competition. In reality, we can get our share of the market.

Many of the borrowers are looking to take advantage of the capital available today to do a buyout or refinance their business. Rates, they are actively shopping for financing based on rates, but most of those small business are not just looking for low rates. They're also looking for a partner that can help them succeed.

This is where we excel. We have a lot of good business experience, many good business people here that can point people in the right direction. So, we have a strong relationship with our companies that we invest in and other financial sources that we can bring to the powerful package to the business that we're looking at.

In addition, we continue to make our existing portfolio company stronger. We've exited some of course, but we've also exited some that didn't show the progress that we wanted so we've given ourselves a better chance at the upside.

I always like to mention the recent economic indicators. This has been the slowest recovery I've ever experienced and I've been in five of them. We continue to monitor a lot of areas of concern, uncertainty around the coming of Federal Reserve's possible increase in interest rates.

Japan is stimulating and knocking down interest rates and I'm guessing Europe will follow. I think it's going to be very hard for the Fed to raise rates, but nonetheless it will happen one day.

Fiscal crisis in the federal government is still on top of my mind as the federal deficit has moved over $17 trillion when you count in all of the things that they have to put forward. It's unbelievable. The government has more than $70 trillion in promises to citizens now, in the form of welfare and other promises like Social Security. One count even had it over $100 trillion. It's just unsustainable.

The tensions that are going on around the world I think are in part due to the fact that our government is so stretched in terms of all the debt and promises that we have on our balance sheet. Many private companies, like the ones we invest in, feel there's too much regulations around, first of all, the health care problem, financial markets, energy and the environment regulations. All of these regulations are hindering their performance and many of them close up. Expansion and job growth just not possible with all of those problems sitting on their table.

Today there are fewer small businesses than there were in the days of Jimmy Carter. We've fallen way back in terms of the number of small businesses out there.

The government is destroying many businesses, on my belief, due to all these regulatory things and so I'm hopeful that there'll be some changes as time goes on.

Despite the economic issues, we feel continued time to invest in growing small businesses. Small businesses are important part of the economy, primarily driver in economic growth and jobs. Gladstone Capital has demonstrated the ability to withstand the economic cycles even the horrible one that was thrown at us this time about five years ago.

October 2014 our Board of Directors declared a monthly distribution to our common stockholders that was $0.07 per common share per month. That's the new preferred shares were also declared at that time. All of this will take place and has taken place in October at the end of November and toward December 2014.

The Board will meet again in January to consider the both on January, February, March 2015. I think that'll be good for everybody.

Through the date of this call we've made 141 sequential monthly or quarterly cash distributions to our common stockholders. We've never missed a distribution. At the current distribution rate our common stock, with a common stock price of about $9.13 as we closed yesterday, we grew about 9.2%. The BDC industry median is about 9.4% higher, but I would remind you that I think some of the BDCs are taking on much more risk on the deals that they're doing then we are taking on.

Our monthly distribution is 6.7%. 7.5% of our newly issued preferred stock is about $1.69 annually and that means that based on the stock price of $25.35 that it's a yields about 6.7% on that.

Let me remind you that we are going to have our upcoming annual shareholders meeting. That's going to be on Thursday, February 13, 2015 11 AM. We're at the Tyson Corner Hilton, just down the street from our offices here, 7920 Jones Branch Drive. Wish all of you would come and ask some good questions. We don't get a lot of shareholders, but we'd love to see many of you there.

In summary, this quarter we're able to report new oil and gas investments and successful exits, above par, from appreciation of our investments at fair value. We need to continue to work on our have slipped and show you new deal originations.

Investment advisor team has successful track record of investing in middle-market businesses. We're working together through multiple economic downturns in the past, and I think we can handle anything the economy might throw at us in the future. We expect a good movement forward in 2015 and hope to continue to show you strong yields on your investment in our fund.

Now if an operator would come, we'll take some calls from some of the people out there that have been listening.

(Operator Instructions)

Greg Mason, KBW.

Great. Good morning, guys. Thanks for that comprehensive overview. I wanted to talk about oil and gas underwriting. You did a couple new deal, so obviously you like that. Just curious of your thoughts with the recent decline in oil, how you think that impacts your portfolio and how you've underwritten for potential volatility in oil prices?

Both of the investments that we described this quarter, the majority of them are in the services end. In the case of SPL, it's much like the deal we closed earlier in the year. It evolved in the measurements and the tracking of oil and gas, which is undoubtedly up, and focused on the Permian basin and the Gulf Coast. Clearly, when you look at both the drilling activity that has happened and the production outlook under any scenario, there's going to be a lot more out there to track, measure, and validate. We view that investment as very much in the back end on production side of the curve. I think that's likely to continue.

In the case of one of the other investments, there is one in Francis and that's probably more on the drilling side. A couple of things to note there, that is a very large-scale company. There's been a lot of additional strategic investments in that company. It has both diversified the field its cover, the services it provides and the customers that it has in its existing portfolio. Order of magnitude, that company is relatively under leveraged and very, very large. It is probably, on average, 3 times or 4 times the typical size in EBITDA in our business, so the combination of the size, scale, strategic acquisitions, and breadth of the operations there really diversify that away from what would otherwise be the risk profile of a smaller oil and gas company.

That's great. Two more questions on the portfolio. It looks like one of your control investments, Defiance, the equity increased another $1 million in fair value. It's up like $5 million this year. Can you just give us thoughts on what's going on there and potential for harvesting that gain? Or do want to keep holding it?

Defiance is performing remarkably. It is continued to book business since it was taken over at the low end of the cycle. It has a unique set of assets and capabilities. It's serving industrial, manufacturing and industrial production in the midwest.

In fact, it is all EBITDA driven. Their performance has gone up. Their debt has been relatively unchanged since it was taken on. In that particular situation, they have fully exhausted the capacity of their plants. There is no more business that they can legibly take on. The nature of their plant, which I think dates back about 85 years, is such that is not optimal to achieve the harvesting that you're referring to at the moment. We are in the process of moving that into a new facility with tremendous streamlined efficiencies and growth opportunity. Once that's completed, we will entertain pursuing alternative courses for that particular investment.

That's great and then one last one. It looks like Saunders took a bit of a hit this quarter. Do you think that's temporary in nature, or any updates you are willing to give on Saunders?

Saunders, I would say, continues to maintain the intellectual property and technical capabilities that are unique in the global providers for the crystal technologies that they can deliver. The challenge has been that is a lumpy business. If you were to think about it, it's a little bit like a semiconductor equipment manufacturer. It goes through cycles. We, along with our co-lender in that transaction, are performing a bottoms up review of the industry and opportunities to try to find better alternatives to scale, which is something that's essentially a very good technologically driven business, but yet is not generating the growth and revenue momentum that it needs.

Our view of that is we are taking some of the strategic analysis, and we will find alternatives to try to better utilize that technology in the industries that it serves. We feel it's still solid. We just need to retool it to better utilize the assets it represents.

Right. Great, guys. Thank you for your comments.

Okay. Next question.

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