Gladstone Capital Corp (GLAD) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Gladstone Capital Corporation's Second Quarter Ended March 31, 2015 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference to our host, Mr. David Gladstone. Sir, you may begin.

Alright, thank you, Eric. That's a nice introduction. Good morning, everybody. This is David Gladstone, Chairman. And this is the quarterly earnings conference call for shareholders and analysts of Gladstone Capital. Common stock trading symbol is GLAD. We do have some preferred stock trading under the symbol GLADO.

Thank you all for calling in. We are always happy to talk to our shareholders and analysts and wish we could do this more often. We like giving you updates on our company and our portfolio, and our business environment. As always, you have an open invitation to stop by our office here in McLean, Virginia, just outside Washington DC. Please stop by and say hello. Our team is here, most of the people, about 60 or so are here and I think they are the finest in the business.

So, we will start off with our General Counsel and Secretary, Michael LiCalsi. He is also President of our -- Administrator, and he will make a statement 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 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 Form 10-K filing and our registration statement as filed with the SEC, all of which can be found on our website at gladstonecapital.com or the SEC's website at 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.

And please also note that past performance or market information is not a guarantee of future results. Please take the opportunity to visit our website and sign up for our e-mail notification service. We don't send any junk mails, just timely news on all of our companies. You could also find us on Facebook, keyword, The Gladstone Companies. You can follow us on Twitter at GladstoneComps. I hope our listeners will read our press release issued yesterday and also review our Form 10-Q for our second fiscal quarter ended March 31, 2015, again filed yesterday with the SEC. You can access the press release and 10-Q on our website, www.gladstonecapital.com and the SEC's website, www.sec.gov. An audio presentation of this call is also available on our website.

And now we will begin by hearing from Gladstone capital's President, Bob Marcotte.

Good morning, everyone. As many of you know, Gladstone Capital is the lending fund of the Gladstone Companies. We provide cash flow based loans to privately held US based businesses in the lower middle market, which we define as $20 million to $100 million of revenues and $3 million to $15 million in earnings before interest, taxes and depreciation. Our loans are used to fund private equity buyouts, make acquisitions, meet growth capital needs or to recapitalize or refinance an existing capital structure. Gladstone Capital was one of the first BDCs focused on lending to the lower middle market, established in 2001 and today that dedication, experience and consistency are a core part of our value proposition. We approach the market with an investor perspective and strive to deliver market oriented capital solutions to support each business' unique capital and growth profile. The majority of our loans today are to businesses backed by private equity sponsors and include a combination of secured first and second lien loans and may include an equity co-investment. We target to make investments of $8 million to $20 million, but will opportunistically consider smaller positions in broadly syndicated loans from time-to-time.

With that introduction, let's review our results for March 31, quarter and our outlook for the markets in which we operate. Regarding investment activity, we are pleased to report that for our second fiscal quarter ending March 31, 2015 despite the usual low in new deal activity in the first quarter of the calendar year, we closed one proprietary deal and some follow-on investments totaling $31 million of fundings for the quarter.

Additionally, we experienced minimal repayments during the quarter, so the new investments translate into net portfolio growth of $30.5 million or 7.9%. The new proprietary deal closed during the quarter was for Precision Metal Hose, a manufacturer of flexible metal and composite hoses used in a variety of industrial applications or supplied to OEM manufacturers serving the aerospace, defense, power generation, general industrial and oil and gas industries.

The financing included $21 million of secured first lien loan and a small equity co-investment and an unfunded working capital line of $4 million. The financing was in support of the acquisition of the Company by a local private equity sponsor, which represented GLAD's first deal with this sponsor. The closing leverage of the deal was a modest 3.5 turns of leverage and the deal yields 9.3%. Additionally we had $9.7 million of follow-on investments in existing portfolio of companies during the quarter including $6.6 million advance to Lignetics to fund an acquisition which enhances the company's market coverage and economies of scale.

With respect to the portfolio overview and performance. In the past two quarters, the cumulative effect of our focus on secured first lien investments has begun to impact our portfolio mix and results. And for greater details we would recommend you review our updated investment portfolio disclosures in our recently released 10-Q. The highlights of the portfolio show that 91% of investments in the last two quarters were lower leveraged first lien unitranche transactions. As a result, our first lien investments have risen almost 10 points from 46.6% of our debt investments to 56.1% of total debt investments at fair value.

The balance of our debt portfolio was second lien investments including a combination of proprietary and syndicated second lien loans as we do not have any unsecured subordinated debt exposures. The consequence of this asset mix shift has a number of implications and we will touch on them over the balance of this call.

On the whole, the fair value of the existing portfolio increased by $6.5 million on the quarter as unrealized appreciation of $14.1 million exceeded unrealized depreciation of $7.6 million. The largest three drivers of the unrealized appreciation for the quarter represented 74% of the increase and included the $6 million appreciation of our equity position in Funko, a toy company that provides pop culture collectables, pursuant to licenses, which is continuing to afford very strong very operating performance.

Other notable valuation improvements included Precision Acquisition Group, which was up $2.3 million and is benefiting from the recovery in aluminum production and Sunburst Media, which we are hopeful to make an opportunistic upcoming sale of the underperforming radio station, which was up $2.1 million of appreciation this quarter. Partially offsetting these movements unrealized depreciation included $2.5 million associated with the rapid performance curation and ensuing restructuring of our syndicated second lien position employed to learning, which was reduced to 35% of cost. In addition, the continued underperformance of GFRC the commercial buildings products manufacturer represents a decline of $1.8 million and $1.1 million of depreciation is associated with the external valuation of our oil and gas investment positions.

With respect to our oil and gas exposure, there were no material changes on the quarter. The industry exposure represents $51.7 million or 14.2% of our portfolio at fair value and continues to perform well. To recap our sector exposure, 59% of the exposure was related to downstream services, which are not directly impact by crude prices. The debt positions are conservatively leveraged with weighted average leverage of only 2.6 times EBITDA and average fixed charge coverage of 3.4 times. All companies are covenant complaint, have ample liquidity absorbing margin or volume pressures and are backed by strong and experience private equity sponsors. Cumulative unrealized depreciation associated with our oil and gas loan portfolio totaled $3.4 million as of March 31 and the fair value represents 93.5% of cost. On the whole the cumulative net unrealized depreciation of investments declined to $52.7 million for the quarter ending March 31 and this improvement represented the bulk of the increase in NAV from $9.31 to $9.55 for the quarter. Despite some successes on the quarter, our non-accrual investments and underperforming assets are still higher than we consider acceptable. This quarter we added GFRC as a non-accrual investment as operational issues have continued to undermine the company's financial performance. The fair value of the GFRC investment was reduced to $2.2 million this quarter and we exercised our creditor rights and have taken control, hired a CRO, who has stabilized the operations and we are assessing our exit options. With respect to one of our larger challenge credits, Sunshine Media Holdings, the company's improved profitability and liquidity supported our moving certain tranches of our investment to accrual status beginning this quarter.

As of March 31, 2015, our combined non-accrual debt cost basis is $39.2 million or 10.2% of the cost basis of all debt investments in the portfolio and has a combined fair value of $9.2 million, or 2.8% of the fair value of all debt investments. We are currently working to exit a number of our legacy underperforming assets and while we cannot discuss specifics, we are looking forward to be able to update you in the near future. That said, while we have had some successes in turning around or exiting several of our non-accruals and more challenge credits in the past year with favorable results, this does not mean that we can do it again or that we will not place other companies in non-accrual in the future.

With respect to our portfolio yields, moving over to our portfolio income profile, the weighted average yield on interest bearing debt investments, excluding reserves in our portfolio, was 11.3% as of March 31, 2015, which was down from 11.5% as of September 2014. This drop is directly related to the cumulative effect of the increase in lower leveraged secured first lien investments funded by increased draws under our credit facility. For the quarter, investment income was up 14.3%, or $1.1 million compared to the prior quarter and compared to the increase in interest expense of $346,000. Our debt portfolio was well positioned for any interest rate increase with 85% of the portfolio in floating rate investments and 15% in fixed rate investments. Our floating rate investments typically have a minimum LIBOR floor and the weighted average floor in our variable rate loans was 1.9%, while the weighted average margin is 9% as of March 31, 2015. Our proprietary loans totaling 82% of the total portfolio cost had a weighted average yield of 11.3%, while our syndicates totaling 18% of the total portfolio cost had a weighted average yield of 11.1%.

Our other income has been significant at times over the last several quarters, which is primarily due to what we call success fees, which are fees generally due upon the change of control of the company are recorded when received in cash, we received over $500,000 in success fees during the three months ended March 31, 2015, which is down from the prior quarter ended December, which totaled $880,000. We track our success fees off balance sheet due to their highly contingent nature and as of March 31, 2015, the off balance sheet success fee receivables totaled $11.4 million or about $0.54 per common share. In total, other income was down $595,000 versus the prior quarter and offset much of the increased interest spread generated by the higher average asset levels. In addition to what we believe to be the favorable risk return profile of the recently originated secured first lien unit tranche investment, this asset shift is also was made in anticipation of the amendment's extension of our credit facility. The revised facility, which is closed and was announced earlier this week, will both reduce our borrowing cost by 50 basis points across the board as well as increase the advanced rates against our secured first lien assets, thus significantly improving our return on equity on these assets.

With respect to the investment climate backlog of loan opportunities and outlook. While the new transaction opportunities in the first quarter were relatively late, more recently activity levels across the lower middle market have recovered and we are currently working on a healthy pipeline of proprietary deals. We continue to see a proliferation of smaller newly formed PE firms looking to take on smaller investment opportunities with increased emphasis on build up or acquisition investment strategies. These trends are well suited to our lower-middle market focus, value proposition and focus on delivering senior secured unitranche financing solutions.

From a liquidity perspective going into the balance of 2015, the competitive dynamics for middle market loans are mixed. Several factors that continue to suggest the tightening of the market including the cumulative impact of regulatory pressures on leverage lending by the banks, weak BDC stock performance to the point that many are trading below NAV, which serves less than the competition to book middle-market loans, and obviously uncertainty associated with the GE Capital's announcement to exit the leverage financing business. The relatively weak flow of deals thus far in 2015 has however still competitive pressures with a few quality investment situations. Competitive pressure continues to be most pronounced in the larger end of the middle market, north of $10 million of EBITDA where the commercial banks and broadest array of non-bank lenders operate. In the phase of this competitive profile, our strategy continues to leverage our longstanding reputation of lower end of the middle market and investor-oriented financing approach, and it continues to gain traction. We are focused on investing in our coverage of relationships with the private equity sponsor community and expect to be able to continue to source attractively priced unitranche transactions in the lower middle market.

Our continuing priorities for the balance of our fiscal year ended 2015 will be managing our remaining challenging credits in the portfolio to an orderly liquidation events where possible, utilizing enhanced availability under the recently amended line of credit and sales of our syndicated loan position or select first lien positions to support the future growth of our proprietary debt portfolio.

And now our Chief Financial Officer, Melissa Morrison will provide an update on the fund's second fiscal quarter financial results.

Great. Thanks, Bob and good morning. I will now report on some of GLAD's summary financial results and overall portfolio statistics for the quarter ended March 31, 2015.

On our income statement net investment income was $3.7 million or $0.18 per share for the quarter, which was unchanged from the prior quarter. Interest income on our debt investments increased quarter-over-quarter by $1.1 million or 14% as the new originations added last quarter impacted this quarter's results. Other income decreased by $595,000 to $483,000 on the quarter as success fees declined in absence of any exits compared to last quarter.

Interest expense increased by $346,000 quarter-over-quarter with the increased utilization on our line of credit, however, the blended financing costs have dropped to 5.1% inclusive of our term preferred issue from 6.5% the prior quarter. Moreover with the recent amendment and extension of our line of credit, we anticipate the borrowing costs to come down an additional 50 basis points. Non-financing costs net of our advisor credit on the quarter increased slightly by $149,000 compared to the prior quarter to $3.2 million. However, they declined relative to the average total assets to 3.5% compared to 3.8% last quarter. Net investment income of $3.7 million fell short of the common distributions declared of $4.4 million for the quarter. However, this short fall does not reflect the recently revised line of credit borrowings or any advisor incentive fee credit.

As we mentioned last quarter on the earnings call our advisor elected to shift the determination of any incentive fee credit from a quarterly determination to an annual determination at the end of the fiscal year, which for us is September 30, 2015. Our fund has experienced significant income swings on investment exits historically. And in the absence of a fee callback feature, the quarterly credit determination was expected to generate greater than 100% coverage of common distributions annually as it did in fiscal year 2014. The advisor is currently working on several of such investment exits. However, we remain committed to providing a credit of the incentive fee to achieve net investment income sufficient to cover 100% of our common distribution on an annual basis, as we have demonstrated over the last several years.

The low net investment income on our income statement are where we reflect 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 appreciation or depreciation on our portfolio is a non-cash event and represents the change quarter-over-quarter in the valuation of our portfolio. During the quarter ended March 31, 2015, the net realized losses were primarily due to a loss on the escrow amount from a previous sale and exit of a portfolio company. For the quarter ended March 31, we recorded net unrealized appreciation of $6.5 million on our investments.

Over the entire portfolio, the net unrealized appreciation for the three months ended March 31 consisted of approximately $200,000 of net unrealized appreciation on our debt investments and $6.3 million of appreciation on our equity investment. Overall, our proprietary investments experienced net appreciation of $8.8 million, while we recognized net depreciation of $2.3 million on our syndicated investments. Our cumulative net unrealized depreciation of our investments as of March 31 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.

From a vintage origination basis, the Gladstone Capital portfolio as of March 31 consists of 10 companies originated prior to 2008 and 40 companies that were originated in 2008 and later. The portfolio investments that were originated in the last seven years, which represents 72% of the cost basis of our portfolio had performed very nicely and are currently valued at 97% of costs and do not include any non-accrual loans. We are actively addressing the older vintage assets in the portfolio as we have demonstrated over the last several quarters and these assets were mostly in media, publishing and broadcasting industries that were adversely impacted by the recession and have been slow to recover.

Approximately 86% of the $53 million in cumulative unrealized depreciation on our balance sheet relates to portfolio companies originated prior to 2008. We believe this vintage analysis of our investment portfolio reflects a marked distinction from the valuation of those assets originated over the last seven years and shows the overall improvement in our portfolio and ability to manage through various economic cycles.

Moving over to Gladstone Capital's balance sheet. As of March 31, 2015, we had approximately $382 million in total assets consisting of $364 million in investments at fair value and $18 million in cash and other assets. Liabilities totaled approximately $181 million consisting of $114 million in borrowings at cost on our line of credit, $61 million in term preferred stock, and $5.9 million in other liabilities. In March, we entered into an at-the-market program, or ATM, whereby we may issue and sell up to $15 million of our common stock. Since its execution, we have sold just under $1 million in our common stock to-date. We are also looking at other capital raising opportunities in the future.

Last week, we closed on a material amendment of our credit facility, which provides for decreased interest margin and commitment fees and extends the revolving period by three years to January 2019 with a one year extension option to 2020. In addition, other terms and conditions were amended to expand the scope of eligible collateral and improved borrowing availability against secured first lien loans. The amendment improved our cost structure effective immediately and revises our credit agreement to better match our core investment focus making us more competitive in the future.

In light of the company's near-term investment opportunities, we will also pursue an upsizing of the total amount of the credit facility in the near term. Overall, our net asset value increased quarter-over-quarter due to the increase in the cumulative unrealized appreciation on the portfolio. Net asset value increased from $196 million or $9.31 per share as of December 31, to $201 million or $9.55 per share as of March 31.

From an available capital perspective, as of today, assuming we continue to draw fund eligible investments we have about $24 million available in aggregate cash and availability on our $140 million credit facility. Additional investment capacity will be accessed from a combination of sources. Prepayments for exits expected from our syndicated loan portfolio, which at March 31 totaled $70 million and through May we have sold $3 million of these syndicated loans and have another $3 million we are expecting this week. The opportunistic sell down of seasoned and performing proprietary senior loan and revolver positions and the planned exit of a number of other investments later in the year. In addition to the foregoing, management continuously evaluates other new sources of capital. In summary, we believe as the BDC, we still are conservatively leveraged as we adhere to the leverage restrictions requiring us to be no more than one to one debt-to-equity.

Now, I will review our portfolio statistics. Please take note that we have moved to update this quarter's 10-Q reporting of our investment portfolio to better delineate our investments across secured first lien, secured second lien preferred and common equity. The current asset mix at fair value is 89% debt to 11% equity and secured first lien investments represent 50% of the total debt and secured second lien investments represent 39% with no subordinate unsecured investments in our portfolio. We currently have 50 companies in the portfolio, which is up from 49 at the prior quarter end. Our portfolio is highly diversified by industry classification with 19 different industries and by geographic region. We continue to avoid industries on the housing, banking, high technology, venture capital, commodity products or highly cyclical industries.

In summary, we continued to build the asset base of the portfolio by investing $31 million in new and follow-on investments during our second quarter of fiscal 2015 and maintained our portfolio yield while continuing of focus on making prudent investments, which provide accretive returns to our shareholders. We believe that the strides we made on emending our credit facility will help us to be competitive in the near future and support our commitment to maintain our longstanding track record of shareholder distribution. And now I will turn the call back over to David.

Alright. The good reports from Melissa, Bob and Michael, they are all good reports. And just to summarize, March 31, 2015, Gladstone Capital closed several attractive investments, total of about $31 million. We maintained a healthy list of new investment opportunities that we hope to close over the ensuing months and continue to grow our business and develop resources. So we are moving along as planned and everybody on the team is doing a good job. Subsequent to March 31 quarter, we strengthened our capital position obviously when we amended and expanded the $140 million credit facility by three years and achieved a reduction in borrowing rates as well as improved the collateral advance rates and better match our current asset mix. We also increased our liquidity by selling off some of the syndicated loans.

Having all these banks come back in should give everybody some comfort. They went through the company in a pretty thorough manner. Our main focus now is just like it was in the past is making loans to more companies. Many borrowers are looking to take advantage of the capital availability and actively shopping financing. But most smart businesses are not just looking for low rates, they also want a partner. It's going to help them succeed and this is where we excel. With all of the business experience that we have and the strong relations that we have out in the marketplace with financial sources, we bring a very powerful package for each of the businesses to look at when we compete against others.

Lastly, access to long-term capital will always be a top priority for us. We utilize our current credit facility and look to raise long-term debt and preferred and even some common stock along the way as needed. Recent economic indicators appear to be moving in the right direction, but most of the moves are very uneven, this has been the slowest most uneven recovery I have experienced and seem to be two steps forward and one step back. To continue to monitor our concerns in the economy, mainly volatility of the oil and gas industry is one thing that continues to bother us. We are just not sure of what impact that's going to have on the businesses that we look at. But that area seems to be stable now and the whole oil and gas industry is benefiting from increasing prices that have moved up pretty substantially in the last couple of months.

Uncertainty around the timing of Federal Reserve's increasing interest rates is driving all of us crazy. We just don't know what they are going to do. I think God only knows what's going to come out of that institution, but remember most of our loans have variable rates and so if rates do go up the interest paid on our loans, we have to match that up directly with what we are borrowing. So, as their rates go up so to ours and we keep our spread hopefully during the future events.

What seems unrealistic also is that Japan is printing more money and so is Europe, and I call this stimulation, but we all know it's a bit of insanity since you can't print money and solve your problems. Inflation is expected to be relatively contained as the Fed's long-term target of 2%, not close to that. GDP growth seems to be consistently uneven, we are now at a low point and perhaps the second quarter will show some upward movement, but the first quarter may even be a negative when they finally adjust it. The fiscal crisis continues to spread too much money on the Federal government. Well, that's on the top of my mind and I seem to talk about it all the time, the Federal deficit is now over $18 trillion and continues to decline as the government continues to spend. We all know this can't go on. It's just like powers into inflation somewhere along the way. The government now has more than $70 trillion and promises to citizens in the form of healthcare, welfare, retirement and all those other promises like social security. There is no way that all of those can be honored as time goes on. The government is just going to have to print money or default and I guess they will do some of both of that.

Geopolitical tensions continue around the world, they impact the US marketplace and fund market, in particular the Middle East is a mess, China and Russia continue to test us and make trouble for the US in various points. Federal and state governments seem to have gone crazy with regulations. Every day there seems to be another pound of regulations that comes out of the government. Many of the private companies like those which we invest to, there is much regulation around, healthcare, financial markets, energy and environment, they really do hinder their growth over the small businesses and we count on those small businesses for creating jobs and now at a low point looks like back as far as 20 years ago. Despite these economic issues we still find good little companies out there to invest in.

They are middle market size businesses. They are not too little tiny businesses like a restaurant. But one has to be very, very selective in this marketplace. Small businesses are important part of our economy and primarily drive growth of course and we want to be able to help them grow. In April 2015, our Board of Directors declared a monthly distribution of $0.07 of common share at the regular distribution on new preferred shares as well were declared for April, May and June. And the Board will meet again in July to consider and vote upon the monthly distributions for July, August and September.

Due to this date of the call, we fade 147 sequential monthly and sometimes quarterly before we started going monthly distributions to our common shareholders and we have never missed the distribution. BDC is typically known as attractive dividend yields and easy liquidity and those way public investors had access to private companies. At the current distribution rate for all our common stock and common stock priced at $8.79 at yesterday's close, distribution run rate is now producing a yield of about 9.5%. BDC industry is right in that same range, so we are not above or below, seem to be right in the same ranges as the rest of the BDC industry.

Our net asset value is $9.55. So when you buy the stock, you get a great value, you are paying $0.92 for a dollar's worth of assets. So you will get a great yield of 9.5% and you will also buy below the book value. And don't forget, we do have one company that's going through a sale process that may produce some substantial capital gains for us maybe in July or August time frame, but that's out there, it's working and that could change a lot of the cash that we have available for new investments.

Our monthly distribution is [675] for our preferred stock, translates into $1.69 annually. Term preferred stock is trading on NASDAQ under the ticker symbol GLADO. It's currently trading at about $25.61, that's about a 6.6% rate. So that also has attractive yield and long-term payout for people who own the stock.

So in summary, we are closing some new deals third quarter ending June 30, 2015. We think that's going to be a good quarter, expected to have good movement forward for the rest of fiscal year 2015 that ends end of September. And so now we will stop and have the operator come and get some questions from you folks out there on telephone line.

(Operator Instructions) Bob Brown, private investor.

Thank you. A few questions. First of all on the last quarter call, you talked about improvements in Sunshine and Heartland. And I know you mentioned Sunshine earlier, and I was wondering if you could update us on Heartland.

Bob, do you want to talk about Heartland.

Heartland is the smaller company. We are currently working through an exit plan that falls in the category of transactions that we expect to close, but cannot cover specific details. Smaller businesses often times take negotiation of sale of asset and/or refinancing in order to effect an exit. We are working on both of those fronts and hope as we said earlier to be able to report on that in the next quarter.

Okay. Thank you. Second question is you mentioned I know the seasonality, you mentioned a low in terms of first quarter deals. I was wondering, at least on an annual basis, do you have kind of -- what are the goals or what should we try to expect in terms of for new loan originations even if it tends to be a little lumpier on a quarter-by-quarter basis?

I think when we look at the market flows we have a certain number of business development folks. We have a certain amount of market coverage. We are currently running I think this quarter was an okay quarter, $31 million invested is probably a little bit low given the average transaction size and resources. I would say that the fourth quarter which if I recall was north of $60 million of closing was probably a little high. So if you were to try to take a midpoint of those two, I think you would probably come up with an average expected on a quarterly basis which I think would put you probably in the $150 million range ballpark. When we think about it, that's probably on the order of 14 to 16 deals over the course of the year relative to our staffing, relative to our ability to due diligence and relative to normal market flows that's probably a good place to be.

Okay. And so if you could just help me understand the issue about the advisor credits, in other words, in theory if there was no success fees and we ended up $0.18 a quarter, so we were short what $0.03 times four, $0.12, we get a credit back from the advisor of $0.12 so that the dividend would be covered?

That's the understanding. I will say that the unusual thing in our portfolio much like other BDCs without equity oriented instruments, as Dave alluded to there is a couple of things on the horizon that we expect to be able to realize on which will cause a lump of potential opportunity cash flow and earnings. And we expect that to back fairly a significant portion of whatever that shortfall is. And to the extent that that doesn't happen, we've reiterated our commitment to support the underlying dividend coverage.

So, if we were to exit that investment and clear that $0.03 shortfall for a couple of quarters, we would not obviously have to wave a portion of the incentive fee to make up that shortfall.

So Bob, just to piggyback on that, we have two fees that come in. One of course is the regular advisory fee that we get, and then there is an incentive fee. So we use the regular advisory fee to pay all the people base salary and a little bit extra and then incentive fee is used primarily for our bonuses at year end. And so when we give back some of the bonus earnings that we've gotten, that's what's you are looking at when we say a credit to the dividend. So everybody here is working to make sure that dividend hits the mark because if they don't, it comes out of the bonus pool. So it's a direct relationship between us and the shareholders.

Right, got it. And last question in terms of -- if there is a back up in rates, right, in other words, so if the rates raise by half a point or a point, is it simply dollar for dollar? Or would we expect the -- in other words, the interest expense we pay essentially just offsets the extra income? I assume not. I would assume we would be making more money as rates go up, is that correct?

The first roughly 75 basis points would be -- there would be a negative consequence. Many of our loans have floors in them. And because LIBOR rates are so low, as LIBOR increases until it clears the floor of all of the existing loans, there would be an increase in interest expense relative to the interest income. The total amount of that exposure is relatively modest. I think the order of magnitude, I think the number is something around $0.5 million of exposure. After the LIBOR increases beyond that, it would be one for one.

One for one, got it, okay. So increase in rates and they were hedged essentially, but it's not like it would be a windfall for us?

That's correct initially, and then as it moves up, it's one for one.

Obviously, that directly increases the yield on the underlying common once it goes beyond that floor.

Alright. What is -- I am sorry, can you explain that last statement?

Well, because we are leveraged less than one-to-one, as the interest income increases, we will have more net interest income to support the dividend.

You don't have all your deals covered by debt. Obviously, some of it's covered by equity as well as it's more equity than there is debt, so as a result, you are going to have a pickup as interest rates go up.

I see, got it. Okay, great. Thank you.

Any other questions?

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

Alright, thank you all for calling in. That's the end of this call.

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone, have a great day.