David J. Gladstone - Chairman and Chief Executive Officer
David A. R. Dullum - President
Mark Perrigo - Chief Financial Officer
Jon Arfstrom - RBC Capital Markets
Vernon Plack - BB&T Capital
Adrian Day - Adrian Day Asset Management
David West - Davenport & Company
Gladstone Investment Corporation (GAIN) F3Q09 (Qtr End 12/31/08) Earnings Call February 3, 2009 8:30 AM ET
Greetings, and welcome to the Gladstone Investment's Third Quarter 2009 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. David Gladstone, Chairman for Gladstone Investment. Thank you, Mr. Gladstone, you may begin.
David J. Gladstone
Thank you, Claudia for that nice introduction, and good morning to you all out there. This is David Gladstone, Chairman. This is the quarterly conference call for shareholders and analysts of Gladstone Investment; trading symbol is GAIN or GAIN. And we thank you for all for calling in. We're so happy to be able to talk to shareholders, and I would like to see come by the office sometime at here in the Washington DC area. We're in McLean, Virginia, a suburb of Washington. Please stop by and say hello your great team work in for you. I think they are the best in the business.
Now, I am going to read the statement of our forward-looking statements. This conference may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the company. These forward-looking statements inherently involve certain risks and uncertainties, even though they are based on our current plans, and we believe those plans to be reasonable.
There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by the forward-looking statements, including those factors listed under the caption, Risk Factors, in our periodic filings is filed with the Securities and Exchange Commission, and those can be found on our website at www.gladstoneinvestment.com, and they can also be found on the SEC's website. 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.
As some of you know, we have a new tradition at the company regarding calls to shareholders. In the past, I did all the talking, but we have a lot of talented people here at the company. So, we've invited some of them to talk to you today as well, and those shareholders are like to hear from some of our talented team. Well, I'm not going anywhere, and neither is Chip Stelljes or Terry Brubaker. We just want you to hear from some of the other top people as part of the team. First we'll hear from Dave Dullum, our President, he will cover a lot of ground including the view of the future. Dave, why don't you start now?
David A. R. Dullum
Thanks, David, and good morning everyone. GAIN as you know, we invest principally in buyout transactions, where we buy small businesses with their management team and the private equity sponsors. Our products to this market are primarily mezzanine or subordinated debt investments combined with an equity co-investment feature.
We accommodate and facilitate the private equity sponsors in their ability to achieve the necessary leverage for a transaction. The recent environment, one we're currently in for typical asset based and bank senior term loans has led to a decrease in this total leverage which in turn has increased the demand for our products.
Through mid-calendar '08, we had also built an investment portfolio in senior syndicated loans of large and middle market buyout. This was never intended to be a continuing aspect of our investing strategy, and as mentioned in previous calls, we no longer make these investments. In fact, we use our existing portfolio of loans from time to time as a source of capital for our principal buyout investing activity.
This portfolio has also been affected by the lack of liquidity in the financial market. So, we are being very prudent in liquidating these loans to minimize those losses. Since the end of the year, we are seeing areas of some improvement in these prices, and we expect this to continue into the New Year.
Through the buyout portfolio, for the nine months ending December 31, 2008, we invested in three new buyouts for a total of approximately $37.9 million, and we made one add-on investment of $3.8 million to one of our portfolio companies in order to facilitate an acquisition. The new investments include the buyout of CCE, a large independent golf car distributor, which was made in the quarter-ending December.
This investment was for $10.7 million, with 7 million in mezzanine, and 3.7 million in equity. This structure reflects the strategy of our investment mix going forward.
We had no exits, although in the quarter ended September, we did recapitalize one of our buyout deals, Quench, in which a private equity firm made a significant growth equity investment and we received a debt repayment of approximately $7 million. As a result, we now own a 4.5% equity ownership stake, and have classified this as an affiliate investment.
It is still too early to expect exits and realized gains from our buyout type investments in our portfolio. We will continue to evaluate the portfolio and try to plan ahead, so when the financial markets do improve, we would be in a position to exit investments as appropriate. We hope more opportunities materialize in the near future.
Regarding buyouts after the quarter end, we made no new investments nor exited from any buyouts, after the end of the December quarter. For syndicated loans, during the quarter, we invested no new syndicated loans.
During the quarter, we received repayments from the sales or settlements of syndicated loans of about 0.9 million including normal amortization. We neither sold nor settled on any syndicated loans for the quarter thus no loss was realized.
As we have mentioned previously, we are selling our syndicated loans when prudent as a means to fund our principal investing activity and to pay down our line of credit. We will evaluate the potential realized loss on each sale in relation to the new proprietary investment we made, as this has implications to our cost of funds and the returns to the portfolio. After the quarter end, we made no new syndicated loans and no new sales.
Status of the portfolio: At the end of the December quarter we had at cost $227 million invested in buyouts and a 127 million invested in syndicated loans for a total portfolio cost of $354 million.
At the end of the December quarter, our investment portfolio was valued at about $325 million with the cost as previously mentioned of $354 million for an unrealized depreciation of around $29 million.
Our portfolio therefore is now valued at about 92% of cost and for reference at the end of September, it was valued at about 94% of cost. A significant amount of that unrealized depreciation occurred in the June and December. For the quarter ending December 31, '08 the overall portfolio depreciated about 7.5 million from the previous quarter, which is approximately 26% of accumulative unrealized loss.
Valuation affects this, and turning to valuations, I wish to call your attention to an important aspect of the methodology we are using for the equity portion of our investments where we have a large ownership position. The valuation methodology, we adopted for those investments, determined that enterprise value, which is based on a multiple of unaudited earnings or EBITDA or cash flow of the portfolio company.
We believe this provides an indication of the aggregate value including the funded debt that the business could be sold for that time. When the company has good cash flows, the enterprise value of that portfolio company will go up, and if that portfolio company has forecast growth or no earnings, the enterprise value will go down.
This is the way the stock market in the investment community generally values the business. Therefore, if a company has very low cash flows or a loss then this method will result in an equity value that is very low or possibly zero.
Even though it's financing adequate and the business fundamentals are solid. So we believe this equity valuation method is very conservative when companies have poor or no earnings of the time of valuation. As a result, this method will produce volatility in the value of the portfolio.
Turning to our record, since our inception in July 2005, we have completed 13 buyout investments for a total of approximately $227 million, at cost at quarter-end with no capital gain exists from that portfolio. And since July 2005, we've purchased 72 loans in the syndicated senior market for a total of approximately $308 million.
Many of these have been paid off or been sold so that the current balance is a $127 million at cost.
Overtime, we will exit all of our syndicated loans with the proceeds directed to our buyouts and paying off our line of credit. I should mention that a few of our buyouts are underperforming, but we do not think they will produce losses.
On the other hand, there are other buyouts that are weathering the current environment and performing well considering the circumstances. We continue to monitor our portfolio closely and proactively provide assistance as necessary.
Loan ratings; our average loan ratings for the quarter remain relatively unchanged; the risk rating system we use set our originated loans at an average of 5.4 for this quarter-end, which is unchanged from the September 30 quarter. The risk rated for unrated syndicated loans was an average of 7.9 for this quarter versus an average of 8.2 for the September 30 quarter, a small but expect a decrease.
Our risk rating system gives you a probability of default rating for the portfolio on a scale of 0 to 10 with zero representing a high probability of default. We see the risk in this portfolio -- in this portion, excuse me of the portfolios staying relatively the same as prior quarters.
As for our rated syndicated loans, they had an average rating of BB2 in the current quarter, down from B+/B1 for the September 30 quarter-end.
However, we are quite satisfied with our current portfolio mix, and as previously mentioned, we are moving towards focusing exclusively on buyouts, and we'll ultimately exit all syndicated loans in our portfolio.
As far as rate, fixed versus variable, we have concentrated on variable rate loans in the syndicated market, so that we are not adversely impacted if rates increase and our cost of borrowing increases as a result. However, rates have come down significantly, so we have seen our income drop on these senior syndicated loans.
On some of our buyout loans, we have variable rates but we almost always have a minimum or a floor in the rate we charge so that if interest rates decline, it will not hurt our ability to make our distributions.
We have 59.9 million in cost and fixed rate loans, all in the buyout deal. They are relatively high rates, so we should be okay there.
Previously, in order to have some protection on our cost of funding at interest rate growth, we purchased interest rate caps on about 60 million of our debt. Some of these have expired, we have not purchased additional caps and we now therefore have caps on about 40 million of our debt.
Let's see the pipeline for deal. Our pipeline of investment opportunities, which includes the mezzanine with equity co-investment and other junior capital instruments, is relatively strong. However, we continue to worry about the economy, and we will be diligent in our pursuit of new opportunity and make sure that they are worth the investment duration to meet our standards.
To the marketplace; first on the syndicated loan side; since our call to shareholders last quarter, the syndicated loan marketplace for large and middle market companies became quite illiquid. Although, since the beginning of the New Year, we are seeing some improvement in indicative prices quoted by the loan arrangers for the stronger company.
As a result, the value of many of the loans in that market had declined through the end of the December quarter, and of course, our portfolio of syndicated loans have generally tracked this market. Due to the liquidity -- illiquidity in this market and as we historically used third-party broker indicative bid pricing in determining fair value, we concluded that these bid prices were not determined of the fair value of the portfolio.
Therefore, we have to find in more representative way to determine that value for these loans. The result was adding through our valuation method for our syndicated loans in our portfolio, a provision the value of the loans using a discounted cash flow method. You'll hear more on this later. The fair value of our syndicated loan portfolio decreased by about 7.5% from last quarter, which includes normal amortization.
Turning to the marketplace with smaller companies and our buyouts. For the buyout market, which of course is where we focus, the environment is different. The major impact on this market is continuing deterioration of the senior loan markets. As senior lenders continue to drop out of the market, it has become harder for the buyout funds to raise the necessary capital for individual deals.
The result is: One; valuations relative to EBITDA have declined. Two, the private equity firms are having to invest a higher proportion of equity relative to the debt, generally we're seeing it up to around 50% from about 30% earlier last year. And thirdly, the opportunity for mezzanine and equity co-investment has grown, even the tranche of investment, which of course now fill the gap between the senior lenders and the equity investors.
These factors are to our advantage. In the shareholders call for the quarter ending September, we had mentioned seeing some of these signs and we have begun to move to position our products accordingly.
We will continue to concentrate on this area and build our pipeline. However, the current economic climate has placed the premium on investing patience, and in the due diligence faced greater emphasis on business analysis. Since the visibility for revenues and product demand in the companies we look at is pride and service.
This illuminates our new investment activity. However, as we continue to price and stage in these buyouts, our balance sheet will reflect the mix of debt and equity co-investments that we have made in these acquisitions. This mix allows us to generate income from the debt investment to provide cash flow for distribution, while we build the equity portion for future capital gain.
I believe the rest of the year will be okay for us, if we manage our asset base and patiently make new investments taking into consideration, our capital constraints.
Our outlook and goal for this fund continues to be the maintenance and consistency of our distribution to shareholders, while achieving solid growth in the portfolio of the proprietary investment in the small business buyout market. And Dave?
David J. Gladstone
All right, thank you. That was great report, very nice in detail. We are excited to have you working on this side of the business force and we expect this fund to do better during the calendar year.
Now, let's hear from our CFO, Mark Perrigo, you're on the fund financial performance. Mark takes away.
Thank you, Dave, and good morning. Let's begin with our balance sheet. Our balance sheet continues to remain strong. As end of December quarter, we had approximately 343 million in assets, consisting of 325 million investments at fair value, and 18 million in cash and other assets.
We had about 118 million borrowed on the line of credit, and had about 224 million in net assets. So we are less than 1:1 leverage. This is a very conservative balance sheet for a company like ours, and we believe our overall risk profile as well.
During the quarter, we did amend our credit facility to extend the maturity date to April of 2009 and reduced the borrowing capacity and its facility 225 million.
Moving to the income statement, the December quarter-end, total investment income was approximately 7 million versus 7.5 million in the prior year quarter, our total expenses including credits were approximately 3.4 million versus 3.8 million in the prior year quarter. Even net investment income, which is before appreciation, depreciation, tender losses, were approximately $3.6 million versus $3.7 million for the quarter last year, a decrease of about 30%.
For the nine months ending December 31st, total investment income was approximately $19.9 million versus $21 million for the same period last year of total expenses including credit were approximately $9.4 million versus $11.4 million in the prior year, leaving net investment income of approximately $10.4 million versus $9.6 million for the nine months last year, an increase of about 8.3%.
Okay, now let's turn to realized and unrealized gains and losses. This is mixture of appreciation, depreciation; actual gains and losses on our investments. Said another way, net realized gains and losses meaning actual gains and losses are from cash sales, for disposable of assets, meaning investment.
Net unrealized depreciation, meaning net unrealized appreciation versus depreciation, is recognized in our statement of operations of non-cash accounting from a change in fair value on the portfolio during the quarter.
For the quarter ended December, we had no realized gains or losses although we did not make any debt investment sales.
As it has been mentioned on many of the past calls, we are continuing to forecast the selling off some of our syndicated loans that have low rates, even if that means we have to take a loss. We are then able to invest the proceeds from the sales of higher interest bearing loans, or users to proceeds to pay down our line of credit.
Regarding unrealized appreciation for the December quarter-end, we had net unrealized appreciation of approximately $7.5 million over the entire portfolio. This is non-cash and comes from the value from the portfolio.
Although our aggregate investment portfolio has appreciated, our entire portfolio is fair valued at 92% of cost at December 31, 2008.
General depreciation of our investments does not have an impact on our current availability to pay distributions to stockholders but does indicate that the value is lower and there may be future realized losses that could ultimately reduce our distributions.
As explained in our 10-Q filing of yesterday, we made a change in our valuation procedures to value our senior syndicated loans using discounted cash flow method versus relying on third-party indicative bids.
Given the continued economic downturn during the quarter ended December 31st, the market for syndicated loans became increasingly illiquid with limited or no transactions for those third-parties for which we hope.
Recent accounting guidance was issued in December 2008, specifically FSP 170 -- 157-3, which provides guidance on determining the fair value of an asset when the market for the asset is not active.
The guidance showed that in the current economic arena, there may be indications of an illiquid market that may include a significant decline in the volume and level of trading activity in that asset, pricing quotes at very significantly overtime or the prices are just not current. The marketplace for which we've historically obtained indicative bids for purposes of determining fair value for our syndicated loan investments show these asset bids as illiquidity.
Historically, our valuation procedures specify the use of third party indicative equals for valuating syndicated loans where there is illiquid public market for these loans and market pricing quotes are readily available. When there was an active market, the use of these agents debt, non-binding indicative bid quotes were seemed to be appropriate and acceptable in accordance with FAS 157.
However, due to the market illiquidity and the lack of transactions at quarter ended December 31st, 2008, we determined that current non-binding indicative bids for our syndicated loans were not based on transactions within an active or liquid market and could not be relied upon and alternative procedures would need to be performed until liquidity returns to the market.
As such, we have valued our syndicated loans using discounted cash flow method for the quarter ended December 31st 2008.
Now let's turn to the net increase or decrease in net assets from operations. This total was a combination of net investment income, unrealized net appreciation or depreciation and realized gains and losses. Please note that we are talking about weighted average, fully diluted common shares when we use per share numbers. This is the most conservative way of stating earnings per share.
The December quarter end, this number was a decrease of about 3.9 million or negative $0.18 per share versus an increase of about 5.1 million or $0.31 per share in the prior year December quarter. This change is primarily due to greater amount of net fund realized depreciation from non-controlled and affiliate investments and a dilution of common shares from the rights offering rolled in the year.
While we believe our overall investment portfolio is stable and continue to meet expectations, with the continuing strong currency (ph), in the credit markets, investors should continue to expect this type of volatility in the aggregate value of our portfolio.
As of December 31, 2008, we do not have any loans with paid in kind income or original issue discount income. We term this kind of income phantom income, because the company does not receive cash but rather has to pay out of this phantom income as a dividend. We avoid such phantom income.
Our portfolio companies are paying on time, and as agreed, with the exception of one proprietary loan and one syndicated loan.
And finally, let me say that due to this issuance of new shares in this fiscal year, which caused some dilution, we have a net asset values as about $10.15 per share at December 31st. This is low as it has ever been and is also related to the depreciation of the syndicated loan portfolio. This concludes our presentation. David.
David J. Gladstone
Thank you Mark. That was a very good report and good summary of our financials... (Technical Difficulty)
Operator: Ladies and gentlemen, please stand by. Your teleconference will resume momentarily.
Thank you for your patience. Your teleconference will begin momentarily. Mr. Gladstone, you may continue.
David J. Gladstone
All right. Thank you very much. It's very embarrassing on our part. We don't know what happened that some reason the phone was dead. Again, Mark, thank you for that good report and summary of our financials. I hope each of our listeners will read our press releases and also obtain a copy of our quarterly reports called the 10-Q, which was filed with the SEC and can be accessed on our website, www.gladstoneinvestment.com, and it's also on the SEC website.
As Mark discussed, we had to change our valuation technique because the market for senior syndicated loans was judged to be inactive. The inactive bids that we were getting from the loan arrangers were left based on actual market activity and more, it looked like to me more like guesses than actual bids. And the volume on the sales was the new issues that almost dried up and for many of the others, they just stopped for... except for few prior sales.
And let me just add as a footnote. The senior syndicated loans that we invest in are the smaller transactions with maybe four to 10 institutions holding those pieces of the loans. So, these smaller ones don't trade at all and are very inactive in this marketplace.
They are not nearly as active as you'd find that some of the big ones in which Moore's (ph) purchased Wrigley's and that was a huge transaction. And those tend to get some kind of activity in the marketplace. But we are not in those large ones; we have been doing the smaller ones.
And the inactive bids that we get for our syndicated loans are based on prices that come from a market that everyone that looked at it from our perspective came up, to say, wasn't active. And some of the sales can only be described as prior sales rather than orderly sales. These orderly sales that is prescribed by the accounting rules and the information released by the SEC regarding fair value, by the way that you are supposed to do it.
And with the enactment and the instruction in Rule 157-3, as Mark mentioned and by the accounting profession, we have the ability to look at in value loans using discounted cash flow incumbent to an orderly sale value. And this release is, I'd hope, just the first step in what will be a forward view of the directive to use prices of inactive market prices at basis for fair value. We really need a lot of relief in this area.
Our biggest worry today is the debt market quote, not only for our fund but for the portfolio companies we finance. We're worried about the bank's ability to provide our line of credit and for banks to provide lines of credit to our portfolio companies. We're working to bring in some additional lenders to help with our line of credit which comes due in April. And we've had some indications from our current lenders that they will lend, it will be more expensive obviously. And we will have probably some tighter terms but it's really too early to discuss what we're discussing with them. But we will have more information out on this topic as we negotiate the terms of our new line of credit for the April time period.
We're also very much worried about our portfolio companies. We can't find low cost bank debt and we think this will have some impact on the future growth of these companies because they lack the funding that they need to grow. And while some of the banks are making short-term loans based on the asset of the business, the banks are not giving long-term loans. And the good news is though that the regional banks... many of these regional banks are making short-term loans revolving lines of credit and they weren't active last quarter. So things seem to be turning. We're seeing the first turn in the marketplace today.
I think this is the first big sign that we've seen that the marketplace is changing for the better. We do spend a lot of time working with our portfolio companies to help them get bank loans. And if needed, we will put in money on a short-term basis to help them through this very difficult and rough time. Nonetheless, it is difficult time. I barely continue to worry about the cost of oil, not where it is today but we are very glad to see fallen pricing and should have a favorable impact on the economy. However, it will surely go back up since the consumption of oil is tied directly to consumers and industrial use. We just feel that the price will go back up the way it did last time.
We are no longer worried about the inflation numbers. The way the government measures inflation, we are not likely to see much inflation for sometime into 2010. Then we think it will come on very strong. I think you will see a lot of changes in the prices of all kind of commodities by the time we get to 2010.
The amount of money being spent in the war of Iraq continues to hurt us. Obviously we think the soldiers are wonderful. They lay down their life every day for us. We support our troops in Iraq. But we can't avoid the war drain on our economy today. But even worse is the huge spending that's going on by federal state and local government. I think many of them are acting irresponsible in their use of our money.
The prior year's government spending was about 44% of all spending in the United States. And that means we are only about 6 points away from officially qualifying as a socialist country. I think they tally up the bail-out spending and the stimulus bill and we'll easily see 50% in government expenditures in 2009.
And this stimulus bill by the way is just another form of pretty radical socialism that's going on, the government taxing the middle and upper income workers and sending check to the lower income workers. This is the purest form of socialism, and this government bail-out industries that should have died years ago. Again, they should have died years ago because of the inefficiencies that they're being popped by the government.
This is government taking your tax dollars and earnings of all of us in the future and our children and giving it to these poorly run businesses that really should have been shut down years ago. Of all the money being spent, very little is aimed at small businesses, and this is one of the biggest mistakes that's going on in this stimulus bill now.
Small businesses create 80% of all the new jobs, and this new spending is missing the opportunity to stimulate the small business right now (ph). The stimulus bill will not create long-term employment. It's going to be a short-term fix. And so we create long-term jobs by helping the small businesses, I don't think we'll get away from all of the problems that we are in today.
The trade deficit with China continues be just terrible. China continues to subsidize their industries to the disadvantage of our businesses. I don't know that this Congress will ever address that issue.
In other ways, the U.S. economy continues to remain in good shape. As long as businesses are not related to housing, or autos, or financial institution, the businesses are avoiding the traumas endured by those industries. And many small business owners and other family people have kept their costs very low and for many businesses profits are still relatively good. But we all know there is a slowdown. We see in a few of the companies that we're in. We're seeing it in people, in businesses that approach out for financing. So there is a dramatic slowdown since the last summer, and it continues to sort of ride through the economy.
Co-min (ph) obviously is much lower than we had forecast or many people had forecast. For those affected industry and finance and autos and housing, lay-offs have been widespread. And now it's spread to those industries that are related to those as well as to the retail organization, because people lack the money to buy goods and services.
The backlog on the order is coming down on many of our businesses but others have still very good backlogs. We're quite surprised with some of the strengths in some of our businesses.
But for businesses outside the auto, housing, and finance area, this to me looks like a normal recession, but for those obviously in the affected industries, the recession is very deep, very difficult. And it's going be life changing for many thousands of people.
We're been lucky that we stayed from the auto manufacturing area, the housing, and the finance companies. We have some investments that touch on these areas, and they will be affected by the disaster. But we've missed the big disasters in this recession that we're in.
I do think we're near the bottom of this recession. And while it may take six months the things to turn around, I think this is an excellent time for people to buy good stock. And I certainly think our company will dub on (ph) in the future as a good opportunity to stock up on it.
Our distributions declared by Board of Directors in January is $0.08 per month per share, or January, February, March as it's a run rate of about $0.96 per year. Some of that distribution is going to be a return of capital that we thought would be made up during the year, but with rate falling so drastically and so many of our syndicated loans with no floors, we've miscalculated the projections of income. And we're going to have some return of capital.
At this distribution rate and with the stock price at about $5.57 just yesterday, the yield is extremely high. We have no plans to reduce the distribution. This means the buyers of the stock today are getting a fabulous return. We are looking at the new release from the IRS that says the some portion of distribution can be in stock. I have no idea of where we're going to come out on that one. We just started to take a look at it, so stay tuned. And we'll let you know if we decide to change any of that.
Please go to the website and sign up for our email notification service. And we don't send out any junk mails. It's news about your company. You can go to ww.gladstoneinvestment.com and find out.
In summary, as far as we can see in calendar 2009, it certainly looks much better than 2008. We can only see for couple of quarters out and you'd see... we think getting a lot better. We are stewards of your money though, and as long as this economy stays as rough as it is, we're going to stay the course and be very conservative in our investment approach and not do any deals if that's what it takes.
And now let's have some questions from analysts and shareholders out there. So, operator if you will come back on and lead the discussion, we'd like to go forward.
Thank you (Operator Instructions). Our first question is coming from Jon Arfstrom with RBC Capital. Please state your question.
Jon Arfstrom - RBC Capital Markets
Thank you. Good morning.
Jon Arfstrom - RBC Capital Markets
A couple of questions here. To the extent you can David, can you talk a little bit about the debt levels of the company, and where we're likely to see that go and maybe give us a bit of an update in terms of how your conversations are going with the banks?
Yeah, we've only had conversations with two of the lenders. And we have a schedule in the next couple of weeks with the third. Both of them have very strong desire to be part of the credit. We think we'll go forward on that basis, but we need to have a conversation with the third one. We are talking about maintaining a level at about 125 which is where we are today. And we also want to help those banks. We don't have one bank that's been not interested in being part of the Group, and they've been part of the Group anyway. But, our hope is that now that things seem to be leveling out a bit that the banks will be more straight forward and want to lend money.
But, Jon, I don't know, we've started very early, obviously we started at the end of January for a line of credit that comes up in April. So, we certainly have plenty of time to workout all the teams and, as I mentioned, a couple of the banks are very interested and very strong in their support of us. We just have to see where it goes during the next 30 days, or take that much time to get everything in place.
Jon Arfstrom - RBC Capital Markets
Okay. And then in terms of the change in valuation procedures, they certainly understand that, it looks like there is one of your syndicated loans where you're able to use a quoted price on, or RPG Holdings? Then I'm just curious what the issue was with that particular credit. And then also wondering, is some of those firmer activity in the market in this -- since year end, describe you to be maybe a bit more optimistic that you'll go back to using quotes at some point?
RPG is the one that you're talking about. And that's because we have a settlement going along there in which we're going to get some cash and another note. And we pretty much know what all of that is. So, it was easier to point to that. And then, it was in the others. RPG sponsors in difficult times and it's being purchased by another company. So, we pretty much know where we're going on that one. And that's the reason for that.
And the answer is -- second part of your answer is yes, we intend to go back to market pricing as soon as the market comes back. And, I'm pretty optimistic that market price for syndicated loans did change somewhat in January. We're seeing some actual new issues come to market now. And it maybe that in March, we can go back to that. And, I guess this is certainly by June, we'll be back using market quotes.
But given the fact that we have some deals in which there four of us in the transaction, four five of us in the transaction and none of us were selling and none of us are buying. So, there are no quotes. And as a result, the loan arrangers who are the people, and some of them are actually own part of the loan pool as well.
They just make guesses, this is to what they think might go on if you dumped it in there is a marketplace today. At this point, there is just no way to use the general guidelines that we'd love to use, which is market price because the market does not care for us.
Jon Arfstrom - RBC Capital Markets
Okay. Fair enough. Thanks, David.
Are there questions?
Yes. Our next question is coming from Vernon Plack with BB&T Capital. Please state your question.
Vernon Plack - BB&T Capital
Thanks very much. David, I had a question about, looking at your 10-Q, I know you have -- you estimate ordinary income versus return on capital given that you declare your dividends ahead of time. And I noticed for the months of January, February and March, comes to your estimates, it looks like the estimate for March is almost $8.8 almost $0.09 for the month, which is much higher than January and February and much higher than it seems in recent history. I'm just curious in terms of why that is, why would ordinary income for that months forecasted to be much higher than any months we've seen here for quite sometime?
Yeah. The quarterly payment of the syndicated loans, they normally don't pay month like value, you get a bigger bonds at the end of the quarter.
Vernon Plack - BB&T Capital
Okay. Thank you.
Any other question.
At this time, we have no further questions.
Well, we'll hold one second, if there is anybody out there wants to ask a question.
Okay. We do have another question coming in from Lee Carter of Private Investor. Please state your question.
Good morning, David.
Good morning, Lee.
Mark, Dave, all of you. I hear that Mark, Mark said the book is today, is 10 something book value?
Okay. Last year, in order -- we have 13 million of bad loans that you were working on, is any loan started to workout for you?
I'm just trying to remember who was in the portfolio, we have our same cost company and that continues to be about where it was before.
Okay. All right.
And -- I'm sorry. We have Lexicon, so that's gone, it was a syndicated loan. But one that still giving us the problem, I say problem what happened is our bus company, the county are short of cash. So they can't buy buses and so that was the material part of their business they obviously have other parts of the business where they fix buses and trucks and do all kind of other stuff, they actually outfit police cars and so they're very geared into a lot of different businesses. But bus sales they want to bid for county last year, I am trying to remember the numbers correctly, they don't hold me towards but it is something like a 100 some buses that they had won.
But the County only bought about 2o some I think, as I remember right.
Yeah. So, they just don't have the money and still the county is... either get governments funds or state funds or funds from somewhere or float a bond many times the counties will float the bond and be able to buy the bus in that way.
They obviously can't run those buses for a long time and you're talking about Phoenix and Las Vegas, those are long distances those buses run. But we are not going to be able to run for ever and at some point in time they'll start buying buses again and I think our company will do well then. But we just got to weigh through it. They are right now paying all their bills and frank along but I think they'll be fine when the buses get back in.
Okay. What on your balance sheet, what you're valuing the senior security loans there, David what percent discount? 16 was last year, it seem to be when we kind of heard.
Have to do a quick number here. I don't have the adjust return on our syndicated loans busted out what are they look like -- we're scrambling close. They're about 76% of cost of senior syndicated loans.
It's a little bit (ph). Any sell-outs possible in '09? Nothing darkened about now?
No, we've talked about a couple of the companies, it's very hard to sell when you're in a recession because everybody discount future cash flows so badly that it makes it difficult to get a decent price. We have one or two of our companies that we talked about. We've actually had people end to see a couple of the companies, but no transactions that we can announce today. Just an indication with interests.
If things open up that you could invest in several companies. How much do you have available, what's kind of investment, total investment you might, you make it was possible. So with the money you got and where you stand today, could you make another 50 billion in investments or what?
The only way -- just two approaches there. First of all if we had to borrow of the money, our line of credit 125 and we've got about 114 drawn on it. So we don't have a lot of money to make new investments from our line of credit.
As you heard, Dave Dullum talk about is the desire if we found the right deal would be to sell off some of the senior syndicated loans and make that investment.
At this point of time, Lee, the real problem for me right now is making any investment given this economy that we're in and we haven't seen the turn, we've seen good indications though we haven't seen the turn that we normally would see before we start investing heavily and so, that's really the biggest problem for me right now is, if I had a lot of money, I'm not sure how much I would put out given the circumstances that we're trying to invest in, and as I say in the business and you know better than me, don't price a stake.
And when the stake is going down as it has been, I mean I've watched in March of last year, we thought the world had turned and started to look very heavily and doing buyouts, and by the summer of course it was miserable again. And then we've said, well this is bottom and we are looking and felling pretty good about that and of course October, November and December were just disastrous periods of time.
So now January is come along, it's not been much stronger, we've seen some good news in the January numbers, but still marketplace hasn't told us that it's time to make a lot of new investments. So, given the fact, that fact I wouldn't look to us given a lot of transaction in this quarter.
Well certainly I don't blame. It's not good, by higher the worse we have ever seen, by far what's going on here. Anyway with the three year except the four pause for the last quarter in '08.
What is that mean?
Very happy. One of you got it all that...
I wasn't sure what you were saying. Therefore Mr. Carter, you got me worried.
(Indiscernible) pause up.
Pause up. I got it now. Okay. That's very good and thank you for the compliment.
In this quarter, we're jumping through the hoops.
Oh, I have to tell you.
You've done a very measurable job, I'd say, compared to American Capital, I see really in trouble. Anyway, thanks, and I'll be talking to you.
All right. Any other questions, Claudia.
Yes. We do have another question coming from Adrian Day with Adrian Day Asset Management. Please state your question.
Adrian Day - Adrian Day Asset Management
Yeah. Hi, David. I just want to talk, about the last conference call in November, a few months ago, I believe you kind of said, you're going to have to be earning the dividend by the end of March. And you sort of touched on that today, do you have any sort of new estimate of when you must be earning the dividend?
Yeah, we apologize. We plunged on that estimate and guess that was a mistake on our part. We just hope that we're going to do it I guess and we didn't quite get to it. My guess is now that we will be earning at maybe by the end of September. But given the economy, I'm just not sure where things are right now. And so, we are very skittish about making any forecast.
Adrian Day - Adrian Day Asset Management
All right. The mistake was probably mentioning it?
No, that's okay.
Adrian Day - Adrian Day Asset Management
We'd like to tell our shareholders what we are thinking. Whether it comes out to be right or wrong, it's better to hear from management what we think might be happening.
Adrian Day - Adrian Day Asset Management
I've got you. Okay, thank you.
Any other questions, Claudia.
Yes, we do have one last question coming from David West with Davenport & Company. Please state your question.
David West - Davenport & Company
Good morning. Actually if the question kind of follows in the vein of the last questioner, to what extent does the Board think about reducing the dividend more in light with net investment income given the capital constraints of this market? It seems like the marketplace may actually welcome that even though at the lower dividend payout.
Well, the Board does consider it. We looked at the numbers this time. We looked at the forecast for the fiscal year that will end... our fiscal year is March 31, '09 for this year, which we're well into. And the Board didn't look at the projections for 2010, March of 2010. We went through the numbers, talked about it. And there is so many variables right now that are just... we're unable to determine what they are that the Board has voted in favor of continuing the distribution.
And my guess is that when we look in April, early April, that will continue the distribution at least another quarter to take a look and see what's going on. I really don't think there is any reason to cut the dividend, because my guess is that we will begin to earn it. I think pricing is going to start to move up. And I also think that we're going be able to move some money at some at some point in time out of our low paying loans into our high paying loans even though it will cost us some loss of equity. But it's such a unusual marketplace right now, so many variables that are undetermined that we are sort of trying to figure out which way the wind is blowing and January wasn't good for many things. But the fact that we are working with a lot of banks now that do revolving lines of credit. I am really surprised how many we got on the list now that are indicating that they are interested in making short-term revolving lines of credit to our smaller businesses.
And I feel the marketplace has changed in that regard. The big problem that you all know, I am sure, many people know that, banks at by the end of 2007 were not the major lenders as they had been in the past. They had been surpassed by non-bank lenders. And there were hedge funds, there were companies like ours. There were many other lenders in the marketplace and actually most of the loans were being made by those groups of lenders rather than the banks. Of course, many of those have gone away now, Lehman Brothers to be an example, were big lenders and they are now gone.
And the point being of that is that the banks now have to take us the slack for the lenders that have gone away. And they are taking some of the slack in the shorter term but there are still no long-term lenders out there for the smaller businesses. And that's what we were hoping that the stimulus bill would do something in that area. I can tell you there are many smaller lenders out there that would be delighted to have 5% per stock from the TARP and would lend it out to small businesses and create lot of jobs and lot of goodwill in the marketplace.
But right now the biggest problem for small businesses is getting some long-term capital, either debt or equity and short-term seems to be much better than it was certainly even 60 days ago. So I'm optimistic that things are turning and that rates will come up. You've already seen some of the government numbers come up, and my guess is that within six months, we'll see some real big changes. So that's the guess that we're trying to make.
David West - Davenport & Company
That's very good. Thanks so much.
Any more questions?
No sir, we've no questions at this time.
All right. Well we thank you all again for calling in. I'm sorry about the loss of the line. We'll try to not hit the speaker in the button next time and as we move the phone around. And thank you all for calling in and that's the end of this conference call.
Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.
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