Gladstone Capital Corp (GLAD) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gladstone Capital Corporation's First Quarter ended December 31, 2017, Earnings Call and Webcast. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. David Gladstone. Sir, you maybe begin.

Well, thank you, Amanda, a nice introduction. Good morning, everybody. This is David Gladstone, Chairman, and this is the quarterly earnings conference call for all the shareholders and analysts of Gladstone Capital for the quarter ending December 31, 2017. Thank you all for calling in. We love these times when we get to talk with shareholders and analysts and welcome the opportunity to provide an update on the company and the investment portfolio.

Now I call on our General Counsel and Secretary, Michael LiCalsi. He is also President of Gladstone Administration which is the administrator for all of our funds, Michael?

Thanks, David, and good morning. Today's call may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties and other factors even though they're based on our current plans which we believe to be reasonable. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors listed on our Forms 10-Q and 10-K and some other documents that we filed with the SEC, and these all can be found on the Investor Relations page of our website, www.gladstonecapital.com or the SEC's website, and that's www.sec.gov. Now we undertake no obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or otherwise except of course, as required by law, and we also note that past performance or market information is never a guarantee of any future results. We ask that you take the opportunity to visit our website, again, gladstonecapital.com, sign up for our e-mail notification service. You can also find us on our Twitter. Our handle there is @GladstoneComps and on Facebook, the key word there is the Gladstone Companies. Today's call is an overview of our results through December 31, 2017, so we advise everyone to review our press release and Form 10-Q both issued yesterday for more detailed information.

And with that, I'll turn the call back over to Gladstone Capital's President, Bob Marcotte.

Good morning, all. And thank you for the -- all for dialing in today. As a quick overview, I'll focus my remarks on the results for the most recent quarter, our portfolio and capital position and include -- conclude with some comments on the near-term outlook for the balance of our fiscal 2018. And for those of you that are interested, we have posted our regular shareholder presentation on our website effective this morning.

The highlights for the quarter ended December 31, 2017, include, during the quarter we closed 4 proprietary investments totaling $46 million, 3 smaller syndicated investments totaling $10 million and several follow-on investments which brought the total originations on the quarter to $57.9 million. We exited 3 investments totaling $14.9 million and along with other repayments on the quarter, brought the total repayments to $20 million on the quarter resulted in net originations on the quarter of $37.9 million. Investment income was $10.9 million on the quarter, which was largely unchanged from the prior quarter, as interest income rose 4.4% with the increase in average assets, which was offset by lower prepayment or exit fee income compared to the prior quarter.

For the quarter, the overall portfolio yield rose 20 basis points to 12%. Net investment income rose to $5.6 million, which covered 100% of our dividends on the quarter of $0.21 per share, as average financing cost dropped with the reduced preferred costs, and net management fees were unchanged, as new deal origination fees paid to the advisor and credited against the base management fee rose.

Incentive fee waivers also declined on the quarter to $85,000. Net assets from operations totaled $0.27 per share, up from $0.21 per share last quarter, with a $1.8 million of net portfolio appreciation in the quarter which lifted the return on equity to 12.9%.

Net asset value at the end of the quarter rose $0.08 to $8.48 per share from portfolio appreciation on the quarter and a small lift from the accretive common share issuance.

With regard to the portfolio overall, the asset mix on the quarter, despite the level of activity, was relatively unchanged, as secured first liens continue to represent 50% of our investment portfolio, and total secured debt totaled 95% of our investments. You will note that we did experience a net increase in our oil and gas related assets on the quarter to 14.3% of our portfolio at fair value, as we closed a new proprietary investment just before the end of the quarter. The investment was for Impact!, a specialized chemical distribution company in the Permian Basin, serving primarily the largest crude pipeline operators. The company is owned by a very experienced private equity firm in the sector that we know well, has a conservative leverage profile and is in the segment that performed well in the last cycle.

Lastly, we've already received proposals to sell down a portion of a large tranche of one of our other investments in the sector and expect this increase in the sector exposure to be temporary. Our nonaccrual investments were unchanged on the quarter, representing a total cost of $27.9 million and a fair value of $5.6 million or 1.7% of our portfolio at fair value.

For the quarter just ended, we successfully grew our assets to over $400 million, while maintaining our diversity with 51 credits in the portfolio. The $400 million threshold was a target we laid out on one of our earnings calls early in 2017 and represents a new high watermark for the company.

With regard to the capital position and outlook, since the end of the quarter, our investment activity and near-term outlook for our lower middle market sector continues to be positive. Through the date of the call, we have closed 1 proprietary investment of $8.1 million and received 3 smaller repayments totaling $4.9 million. However, our near-term backlog, including several highly probable follow-on investments continue to outpace our historical average originations.

We ended the year with a bit more cash than is typical, however, we're very mindful of our current investment capacity and are taking several steps to address the matter. While we have approximately $34 million of availability under bank facility today, we are in the process of revisiting the size and pricing of this facility and hope to be in a position to make an announcement in that regard prior to the end of the quarter.

With the recent completion of our shelf, we plan to reactivate our equity ATM program, provided our common stock continues to trade above net asset value, as it has been very cost-effective in supporting our growth over the past couple of quarters.

Lastly, while prepayments have been modest in the past several quarters, we do anticipate them to pick up, and between prepayments, selected syndicated loan sales and selling down some of our oil and gas exposure, we're well positioned to continue to capitalize on our outlook for the lower middle market opportunities over the balance of 2018.

Regarding the outlook, as I mentioned earlier, we're cautiously optimistic. We should see net originations in the quarter -- in the current quarter at least on par with the elevated levels we reported last year. We attribute the current deal momentum as well as our ability to maintain our investment yields and portfolio performance in the past couple of years to our continuing focus on delivering added-value solutions to growth-oriented, lower middle market companies. And while the lower middle market is not immune from competitive conditions from larger asset managers, and certainly, there has been some spread compression, we continue to believe we are well positioned to continue to grow our investment portfolio and net investment income to support the growth of our shareholder distributions.

And now I'd like to turn over the call to Nicole Schaltenbrand, our Chief Financial Officer, who'll provide an update on the funds -- first fiscal quarter financial results.

Thank you, Bob. Good morning, everyone. Let's begin by reviewing the income statement. For the December quarter, total interest income increased by $400,000 or 4.4% over the prior quarter, primarily due to the increase in the weighted average principal balance of our interest-bearing investment portfolio from $343 million during the prior quarter to $353 million during the current quarter as well as a 20 basis point increase in the weighted average yield quarter-over-quarter. Other income decreased by $400,000, primarily as a result of dividend income received in the prior quarter.

Total expenses decreased slightly by $100,000, driven by $100,000 decline in total financing expenses with the full impact of the recently refinanced preferred despite higher average LIBOR and a 24% increase in average borrowings on our line of credit.

Net management and incentive fees were unchanged at $2.2 million, as new deal origination fee credits rose with originations, and the incentive fee credit declined to $85,000 during the quarter.

For the quarter ended December 31, net investment income was $5.6 million or $0.21 per share and covered 100% of shareholder distribution. As we have demonstrated over the last several years, our advisor remains committed to crediting its fees, so that net investment income covers our shareholder distribution.

Moving over to our balance sheet. As of December 31, 2017, we had approximately $410 million in total assets, consisting of $392 million in investment at fair value and $17 million in cash and other assets. Liabilities totaled approximately $184 million and consisted primarily of $131 million in borrowings outstanding on our credit facility, $52 million in the recently closed 6% Series 2024 Term Preferred Stock at liquidation value and about $3 million in other liabilities.

Net assets increased by $6 million since the prior quarter end due to $1.8 million of net portfolio appreciation and $4.5 million of common equity raised under our ATM program. For the quarter, we issued approximately 471,000 common shares under our ATM program at a weighted average price of $9.69 per share. NAV per share increased by $0.08 to $8.48 as of December 31 compared to $8.40 as of September 30.

Looking forward, we continue to be well positioned to benefit from any upward movement in interest rates, as 91% of the portfolio is tied to floating rate investment. The weighted average LIBOR floor on these assets is 1.3%, and with floating rate assets of $370 million and only $130 million of floating rate debt, a 100 basis point rise in LIBOR should generate an approximate 5% increase in net interest income.

Inclusive of the net originations of the past quarter, our leverage position increased to approximately 80% at December 31. However, net of the cash pay down subsequent to the end of the quarter and some of the liquidity plans Bob outlined earlier, we believe that we are well positioned to continue to support a modest level of new investment

Now turning back over to David to conclude the presentation.

Well, Nicole and Bob and Michael, I think you all did a great job of informing our stockholders and the analysts that follow our company in summary. Gladstone capital continues to report a strong quarter and are very well positioned to continue to grow in 2018 and our year-end at September 30, 2018, I think, is going to be one of our best years.

Last quarter, the team closed 7 new investments of almost $400 million in assets now. So moving along to a high watermark and hopefully can go much higher than that. We have a great backlog of deals yet to go. Successfully sold or had repaid some of the loans that we're -- we had and exited from 3 investments all above par -- or at par or above par.

The company has maintained a middle market focus. Overall portfolio yields, which benefit greatly from the new tax law, these are -- most people don't know that the middle market is the third largest economy in the world if you think about the U.S. being the first and then of course, the middle market at the U.S. and then China after -- China just before that. So it's quite a large market, we're in the lower middle market, but that seems to be the place that we can get strong returns.

As always, we manage our portfolio of loans, and we believe that we're well positioned to continue to grow the loan assets and enhance shareholder distributions. Distributions are the thing that I love the most. We've maintained and committed to paying at shareholders monthly cash dividends. In January, our Board of Directors declared a monthly distribution of $0.07 per common share for the months of January, February, March. That's an annual run rate of $0.84 per share. Through the date of this call, we've made about 180 sequential monthly or quarterly cash distributions to our common shareholders, totaling almost $300 million in distributions. We never missed a distribution, and that's about $11.45 per share on the shares outstanding at December 31, 2017.

Current distribution rate of our common stock, with the common stock price now down to $8.53 as of yesterday that distribution run rate is producing an average yield of about 9.85%, which continues to be an outstanding return relative to most of the yield-oriented alternatives. Our monthly distribution of 6% on our preferred stock, which translates into $1.50 annually, the term preferred stock under the ticker symbol GLADN closed yesterday at $25.08, which provides a terrific yield, a very safe stock to hold. That's $0.125 per month that's getting paid.

In summary, the company sees an improving position in private businesses that are midsized and with a good management. Many of these are owned by middle-sized buyout funds that are looking for experienced partners like us that will lend money to the businesses they're investing in. This gives us a chance to make attractive interest paying loans, which support our ongoing commitment to pay cash distributions to the shareholders. We got a strong team here and continue to capitalize on this market. So now let's do the fun part. So operator, if you'll come on, we will have some questions from those on the call.

(Operator Instructions) And our first question comes from the line of Mickey Schleien of Ladenburg.

Yes, Bob, terms in the lower middle market were relatively borrower-friendly the last couple of years, and now we're seeing folks, sort of, coming to agreement that interest rates are definitely going to climb higher. So I'm interested in understanding what sort of assumptions you've made in terms of your underwriting over that timeframe regarding the potential for higher interest rates to trigger more defaults, as companies have a harder time servicing their debt?

Thank you, Mickey. A couple of comments there. One, I think we are pretty transparent with the leverage levels that we've continued to underwrite, and as you can see from our shareholder presentations, leverage levels have not really spiked and certainly are not anywhere near some of the larger transactions and certainly the syndicated marketplace. Our average portfolio yield has not moved substantially. The other piece that I would say is we are very focused on cash flow fixed charge coverage. Obviously, being in the lower middle market, we actually get covenants, so we are able to specify levels and manage those significantly. So typically, we're looking for leverage levels and debt service coverage levels that'll be approximately in the 1.5% range, which is pretty healthy. Last couple of comments, I would say, for the most part, while rates are going up, most of the analysis that we've seen, our tax rates are going down and tax rates are going to be far more impactful than interest rates going up as long as they can maintain profitability. And lastly, as I've said repeatedly, we focus on growth-oriented businesses, organic growth that can deleverage the companies and generally is outpacing the interest rates that we are focused on. So all of those factors, I think, our companies are pretty well positioned on a go-forward basis.

Bob, just a couple of follow-up questions if I may. In the past, you've been using the equity ATM pretty actively to help manage your leverage, but as you pointed out, stocks now a bit below NAV, so I'd like to understand what your target leverage in terms of debt-to-equity is in this sort of scenario? And my other follow question is, was there anything idiosyncratic in the quarter that drove the high level of investment activity? That's it for me.

Okay. As I said, we are probably nearing the top-end of the range of where we want to typically play. And as part of the process I outlined the various mechanisms that we are already beginning to implement in terms of prepayments, in terms of asset sales, so I would not expect our leverage to creep much higher than where we are. And in terms of the elements of the portfolio, I guess, I would say closing 4 different investments, the largest one being $20 million, the average of those 4 being closer to a $10 million range, which is historically the norm for us, I don't think there is anything too unusual there. I would say, the deal flow activity that happened in the third quarter, we saw a tremendous amount of flow in the August and September timeframe. Those deals ultimately percolated to a year-end closing. As is typical, Q4 tends to be a very busy quarter, as people close out the calendar year. There was nothing unusual in those transactions that was tied to anything. They were very different businesses, software, aerospace and defense. There was really nothing -- there was nothing in the sector or those names or the size of those names that I would say is differentiated in any real way.

Just to tag on to that Mickey. The tax changes that have gone on are very well received in the small and midsized business marketplace, and I think you're going to see a pretty good run over the next year or 2 just based on that.

Absolutely, our next question is from the line of Henry Coffey of Wedbush.

So when I'm just, sort of, looking at the balance sheet overall, it seems like we've got about 2 or 3 quarters of improving fair value to cost marks, and you're also obviously -- there was some realized gains in the past. When you look forward, what are your thoughts about: a, whether you'll be able to liquidate investments when required at a gain?; and b, the overall balance sheet, are we going to see a continued recovery? And then, kind of, going back to the first question, with rising interest rates, is that in and of itself going to, kind of, put downward pressure on the value of the portfolio?

Lots of questions in there. It's -- I think most of our deals, Henry, are variable rate, so as rates go up, it's not going to put a big pressure on the valuations. We're going to follow it up, so positives there are, we don't get hurt by rising interest rates. The small businesses, obviously, at some point in time, can't pay an interest rate if it went, you and I remember years ago, prime was 18%, nobody could pay that, so you have to work with the small businesses. I don't expect interest rates to grow at a rapid pace, and I think all of this craziness in the equity markets of the stock market right now are just noise. It'll go back to something normal soon. But you look at the liquidations as we go forward, I can't see any big capital gains, we get some capital gains from now -- from time to time. I think you'll see a steady uptick in our valuations. I don't see anything that's out there that's destroying the marketplace at this point in time, but you remember if the marketplace goes crazy, we have to value our portfolio down just because the whole world is being marked down. So we follow the market down. The old saying is "When this tide goes out, all the ships go down". So we'd have to follow that down in our valuation methodology, but I don't see anything big right now. This is predominantly a correction, and at this point in time, it's great time to buy this stock at almost a 10% return. So yes, balance sheet will be beat up a little bit by rates moving around, but not dramatically.

Henry, just to follow on David's comment. Two points that I would make: One, I think you've seen in the last couple of quarters, the improvements in a couple of our credits. It obviously -- they go down pretty quickly, and they come back very slowly. These are conversations we have quarterly with our outside valuation firm at S&P. And it's not easy to get things moving out, but we have a number of our underlying portfolio companies that are improving and I'll point to a couple of the marks up in our oil and gas, 1 particular name in our oil and gas portfolio. There's still significant depreciation that has not been fully recovered, while the underlying operating performance of that company has been stellar. So there's probably some positive movements on that side. The other thing that we tend to see in terms of appreciation. When I look down the top 5 of our assets, 3 of the top 5 have substantially deleveraged. When we go into our growth portfolios and we -- maybe, we'll close at 3 or 3.5 or something in terms of leverage. Next thing you know it's at 2 or 2.5 in terms of leverage. Two things happen, one is they look at our interest rate being in the low double digits, and they start to think about refinancing; and two, in some of these situations, we have warrants. So we don't value those warrants, based upon where those things are, or where we're expecting them to trade. So there are number of situations that have substantially deleveraged, and I suspect we will have appreciation, prepayment fees and/or some equity co-investment recoveries in those situations. So I think we feel pretty good about where we are, and the fact that we haven't been taking large marks is indicative of the underlying operating performance of those companies.

So when you look under the table, forgetting interest rates or -- yes, certainly stock market -- we have seen worst, David if you remember. The -- that when prime was at 18%, by the way, I was a hippie, so...

Wow, I was trying to collect loans.

So when you...

We were charging 5% over prime at the time. So it was a little bit difficult. Okay, I'm sorry to interrupt.

So -- yes, I am sorry. The underlying -- so when you look under the table, you're saying that the underlying performance is getting better. And so we're in a positive shift and just when you look at the hard side of the companies, is it what's driving your confidence?

Absolutely.

Absolutely. Yes, as I mentioned there is a lot of positive views of the world from the economic side, not from the stock market. There's so many crazy traders out there today that they bounce the marketplace. A lot of them are all automated, so you just never know who's selling and who's buying. Anyway, that's not what we look at, it's the underlying look at our company and the economics of the marketplace that we think of, not the stock market.

And our next question is from the line of Christopher Testa of National Securities.

Was the $3.6 million transfer from first to second lien on the portfolio, was that all from Alloy Die Casting? Or was that something else? And what triggered that?

When we raise money inside of a portfolio company, occasionally we will use secured bank facilities for working capital purposes, and so when we raise a secured working capital asset and it goes beyond 1 turn of EBITDA, our bank line facilities require us to reclassify that as a second lien, even though theoretically, we have a first lien. So that business raised some working capital assets to support its growth and the new management team that's driving the performance there. And while we didn't actually changed our security in any way, shape or form, it was dropped by virtue of a relatively small working capital line at the company. That is one of our challenged assets, and it has improved substantially, the liquidity has been rebuilt, and I hope to be in a position to announce something more positive in the coming quarters on that particular investment. So don't take the migration of anything that's negative.

Okay, great. And how much of the unrealized gain during the quarter was from idiosyncratic underlying performance versus positive changes on the tax perform?

We don't really -- tax adjustments were not really a big factor in our valuations. Folks with bigger equity positions might look at that, but that is not factored into any of our analysis. Our movements were straight out of the valuations that we get, as I referred to earlier, from our outside valuation agency. And there were 1 or 2 large adjustments that, I would say, probably are concentrated in, as I referenced earlier, dramatic recovery in one of our larger oil and gas assets, which I think, was one of the biggest movers. And so I don't really see it as something other than the normal, natural improvement in the underlying portfolio.

Got it. And Bob, I know you had mentioned that, subsequent to quarter-end, you guys had sold down a part of 1 of your oil and gas related investments and you're expecting the spike to be temporary. What should we look at going forward, as kind of the threshold of where you're comfortable having that as a composition of the portfolio?

Right now, it's probably at the high watermark. We are working on selling it down, but it's probably just under 15% and that's a high watermark for us.

Oh no, I understand, but I mean subsequent to selling it down, I mean, where would you be comfortable with that being, I know you had mentioned that, that's pretty much the highest it will be. I mean, where would you be comfortable with that being?

It's a very broad-based statement, Chris, if your investments are 2 turns of leverage, and you have an immediate liquidity event on the horizon, I find it hard to artificially constrain that. I would say, it's at -- it's the high end of the range, it will come down, I can't really -- I don't want to put a continuing -- we would not have taken on the recent investment, if we didn't feel very comfortable about the circumstance around that business, that sector and that sponsor. So I don't want to be running the solid investments, because I put a percentage out there that it's got to be asset-by-asset specific and, in this situation, I have already given you an indication of, kind of, where I get concerned about diversity, so it will come down, I don't want to put a hard number on it.

Okay, that's fair. And then last one for me, you guys had mentioned you're expecting prepayments to pick up and selling down some of the oil and gas, some syndicated loans, are you expecting that you are going to need a meaningful draw on the facility or ATM issuance for growth over the next quarter or 2 given those dynamics? Or should the sales that you are anticipating with the prepayments, kind of, be enough to drive portfolio growth, the next 2 -- 1 or 2 quarters?

It's a question that I'd love to be able to project for you exactly. Prepayments, as I've said in the past, are very difficult to project. We've got situations in our portfolio, where we are a second lien earning, low-teens rate and there's no debt in front of us. So when that company decides to raise money and pay us off, they could certainly do it. We have large exposures where we're getting similar rates, and they're sitting on $25 million to $30 million of cash. So when they decide to make prepayments is entirely within their prerogative. We obviously, hope, some of these businesses, as we originally underwrote them, are growth-oriented businesses, and they will find something to buy, they will find something to expand and grow -- drive appreciation of their equity, but calling that exact prepayment is certainly a challenge. The second thing that, I guess, I would note, if you look at the difference between what our ending balance sheet was, I believe we're at roughly $393 million of investment portfolio, and our average assets outstanding, which was $353 million, you're looking at almost, if we just maintain where we are, our earnings portfolio -- our earning assets are $40 million higher than what we experienced on average for the last quarter. So we just have $40 million of additional earnings lift off of the existing portfolio, and obviously, our marginal borrowing costs from our bank lines are still fairly attractive, so we've got some momentum. It's the balance sheet that's probably, at this point, a bit more leveraged than it's been in past quarters. In the near term, we are planning between monetizations and some sell-downs and some expected prepayments that we will see enough there to support some of our investment activity. I will say it will probably be somewhat constrained to the extent the ATM opportunity to issue is limited. I think we can manage the natural growth in some of the organic follow-on investments, but we may be somewhat curtailed, as we pursue additional opportunities if the equity market is not conducive to continuing that ATM program.

And our next question is from the line of Andy Stapp of Hilliard Lyons.

What were the new production deals during the quarter?

Seven.

New -- while there were 7 total deals, there were 4 primary -- proprietary and 3 syndicates. The deal specifically, there was a software technology business, it's all listed on our Q Page 26, a software technology business, a aerospace defense supplier manufacturing business, there was a consulting business in efficient -- efficiencies and production capabilities, and there was the oil and gas chemicals distribution business that I referred to as the 4 primary proprietary investments.

We do have another question from the line of [Bill Brown], a private investor.

Last year, lot of the targets that you were articulating like maintaining return on equity over 10% and maintaining your yields that you've done and getting to $400 million which you've done. I'm just wondering -- I know you don't give specific projections, but in terms of the dividend, assuming we can maintain these things and we've gotten some movement on LIBOR. Do you -- how confident are you to think that this could -- this would be the year that we could raise the dividend?

Oh well, you're just right in the heart here, I'll let our president answer that question now.

Yes, I think, the thing that we've focused most on and where I get the most amount of confidence is, in my comments on our press release, our net interest margin has been moving substantially over the last year. That means the amount of interest income over interest expenses we've generated is up 24% December '17 over December '16. That is what drives dividends. The combination of that and the fact that the earnings power has held up and our voluntary incentive fee credits are almost 0 today. If you add to that what I alluded to in terms of the average assets that are outstanding and the continued movement to reduce our financing costs, all of those things are headed in the right direction. That continues, I suspect by the end of the year, there will be significant discussions around doing something in that line, but the earnings power is the driver here, and I've said that before, and I think we're in very good position to take up that baton, as we get towards the tail end of our fiscal year.

Yes, that's great. I mean I -- and it certainly seems that way. All the other goals have been met, so that sounds terrific.

Yes, we do have another question. (Operator Instructions) And the line of David Miyazaki from Confluence Investment.

I guess, just as an observation, I guess I'm not surprised to hear that Henry at one point was a hippie and that you were lending at double-digit prime numbers in the past. But I do actually want to, kind of, go back to that, not all the way back it -- to that double-digit prime environment, but David, back in the 90s you were involved in lending and my recollection is that you had a constructive relationship with the SBA. And in the last 20 years, couple of decades, it's really not been something that has been a strategic focus. I was wondering if with the changing environment in Washington allegedly becoming a little bit more business friendly, have you revisited that concept of going to the SBA?

Yes, we've talked about it a lot, and I'm waiting to see what Congress does with regard to BDCs. They've talked about allowing BDCs to leverage more. My preference would be to leverage outside of the SBA. Most people like the SBA, because it's "cheap money", but once you add in all the expense of dealing with the SBA and the extra time and people, it's not that cheap. So my preference would be if the government is going to do it, then this is Congress, if they'll increase the amount of leverage that a BDC can have without having an SBIC it would be very delightful.

So you're -- I mean the number that's kind of floating around that there is moving from 1 to 1 to 2 to 1. How would that change the, kind of, loans that you're doing? And the amount of leverage you would hold on your balance sheet?

Most likely, not change the kind of loans and the way we do transactions but might change just a little bit in terms of just putting a few more leverage on the balance sheet. We run at about 220 to 1 as our sort of fail-safe number, so if we could go up substantially from that, and we could get long-term debt or preferred stock as the leverage, I feel a lot more comfortable, because the loan portfolio has continued to get stronger. And the stronger it gets, the more you can tolerate leverage, but never want to tolerate short-term leverage against long-term bets that we make, so matching the book will still be something that we spend a lot of time on, and it serves you well. So the goal is to see if Congress will do something for BDCs, and if they do then we probably wouldn't spend any time talking to the SBA. That would be my preference.

In the portfolio, just a color -- let me give you some additional color. Today, if we want to participate in a larger transaction, I mean, larger, maybe $25 million to $40 million. The pricing on that is probably below where we typically can play. So the only way we can play in that deal today is we'll take a second lien interest if we like the fundamentals, like the overall leverage and all the other credit metrics. So you've seen that play out through our portfolio where our second liens have grown over the course of the last year, and we've, kind of, hit an equilibrium of about 50% senior and 45% second. So if we had more leverage, we probably would have more first lien assets and less second lien assets to avoid the situation I alluded to. Secondly, if the pricing compression were to continue, we're on the verge of think -- assessing off balance sheet partnerships or lending joint venture type arrangements to be able to take advantage of some of those opportunities that we cannot run on our balance sheet at one-to-one leverage. So both of those become less required or less urgent if the Congress were to move the benchmark for us. Obviously, market conditions are continuing to evolve. If the spread compression abates in light of some of the market conditions today, obviously, that will also change those considerations. So it's a moving situation, but overall I think the leverage would give us a little bit more flexibility relative to our peers who are fairly heavily leaning on the SBA nonregulatory exclusion of that debt capital.

Yes, so if I understand it properly, then what you're saying is that with the higher leverage change, if Congress were to do that then it would open up the door for you to have a more senior-secured-oriented focus, maybe with some larger companies and still maintain the same ROE?

Yes. Yes, I think proportionally, because of the amount of the debt, we really, compared to our peers, don't use that leverage as aggressively. I think it gives us little bit more flexibility on the ROE equation.

Sure, sure. And what was that -- roughly speaking, not without -- and just a ballpark, when you think about the EBITDA of the proprietary deals that you did this quarter, what -- roughly what was that level? And is that pretty consistent? Is that where you've been over the past few quarters?

It is fairly consistent, I mean typically we won't touch anything under $300 million of EBITDA and very rarely will it probably go above $10 million were going with a more rifle-shot approach to a sub-second lien position. The second lien positions tend to have much higher EBITDA, and we slide into a much larger transaction. This quarter, I would say, the range is somewhere between $3 million and $8 million. I will say when you look at our largest assets they tend to be much larger companies, we have some in the portfolio that are approaching mid-20s in EBITDA today, so -- but we're still in the same sweet spot, sub-10 is our primary focus.

And -- so I presume then it -- the smaller amount of the syndicated deals that you do will tend to have much larger average EBITDA, like maybe in the mid to upper middle market kind of size?

Yes, the syndicated deals, I would say, are somewhere between $50 million and $150 million of EBITDA. And we typically play in those situations where we wouldn't otherwise be able to participate in those industry -- the diversified industries that those businesses represent, and so it -- they are definitely upmarket, and I would say our participation in that realm has dwindled dramatically, we happened to see a number of situations in the last quarter that were a little unusual, but I think if you go back over our track record, our percentage of assets in that category had decreased dramatically. I think we had a low point before the use, we were probably in the $20 million to $25 million of the total investment, and relative to our portfolio, that was under 10%. There have been times in the past where that number has been upward of 20%. So that portfolio has been decreasing, and as we've said in the past, we occasionally find opportunities, as it gets towards the December quarter, tends to be a stronger point for that kind of investment and we took advantage of that last quarter.

I'm showing no further questions at this time, I'd like to turn the call back over to Mr. Gladstone for the closing remarks.

Well, thank you all for calling in. It was a great quarter, and we all look forward to talking to you again next quarter. That's the end of this conference call.

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