Gladstone Capital's CEO Discusses F2Q13 Results - Earnings Call Transcript

May. 1.13 | About: Gladstone Capital (GLAD)

Gladstone Capital Corporation (NASDAQ:GLAD)

Q2 2013 Earnings Call

May 01, 2013, 08:30 am ET


David Gladstone - Chairman & CEO

Melissa Morrison - Chief Accounting Officer


Troy Ward - KBW

J.T. Rogers - Janney Montgomery Scott


Good morning, and welcome to the Gladstone Capital Corporation’s Second Quarter Ended March 31, 2013 Shareholders Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note that this event is being recorded.

And now, I would like to turn the conference over to David Gladstone. Mr. Gladstone, please go ahead.

David Gladstone

Alright thank you Keith, thanks for that nice introduction and hello and good morning to all of you out there. This is David Gladstone, I am the Chairman, and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Capital and with common stocks traded on NASDAQ under GLAD, and we actually have some preferred stock traded under GLAD and P for preferred; both of these on NASDAQ.

Thank you all for calling in and please remember that if you happen to be in the Washington D.C. area we have an office in McLean, Virginia which is a suburb of Washington D.C. you are invited to come by and say hello. You’ll see some of the finest people in the business.

I want to take the opportunity to introduce you to the website, we’re at and you can sign in and sign up for notification service. We don't really send out any junk mail, just news on the company in a timely fashion and you can also find us on Facebook under the keyword The Gladstone Company and you can follow us on Twitter under Gladstone Comps.

Now I need to read the statement about forward-looking statements. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the company.

These forward-looking statements inherently involve certain risks and uncertainties and other factors even though they’re based on our current plans when we believe those plans to be reasonable. Many of these forward-looking statements can be identified by the use of words such as anticipate, believe, expect, intend, will, should, may and similar expressions.

And there are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including those factors listed under the caption, Risk Factors in our 10-K and 10-Q filings that are in the registration statement as filed with the Securities and Exchange Commission. All of this can be found on our website at or at the SEC website.

The company undertakes no obligation to publicly update or revise the forward-looking statements, with results or new information, future events or otherwise after the date of this conference call. Please also note that past performance or marketing information is not a guarantee to future results.

Alright let's start off, during the first quarter ending March 31, 2013, this is the second quarter ending March 31, 2013, we invested in two new syndicated loans about $6 million while we continue to focus on managing our current portfolio. Additionally, we funded about $3 million of existing portfolio companies some revolver draws and some investments and we've seen it unfortunately about $4.4 million in scheduled and unscheduled principal repayments during the quarter.

Overall, we had a slight increase in net production this quarter as compared to the quarter ending December 31, 2012, and during this second quarter that we're reporting on today, we continue to manage our current portfolio while working on a list of new deal opportunities that will fit within the current investment strategy and objectives.

Subsequent to March 31, 2013, we funded about $300,000 in revolver draws. We have received about $4.2 million in scheduled and unscheduled loan repayments including about $3.5 million in two early syndicated loan payoffs. In April 2013, we were able to exit an investment in Kansas Cable Holdings; been on our books for quite a while and net proceeds were $0.5 million and we had this valued at about $18,000, but unfortunately we had from the beginning about $2.9 million, which we reported in the quarter ending June 30, 2013, so that loss hit us in the -- it's going to hit in the quarter ending June, 2013.

Kansas Cable had been on non-accrual status for a long time; we just exhausted all viable strategies to turn this company around and I believe it was prudent step to end up selling it to a large cable company that bought it relatively cheap, but at the same time going forward for us didn’t seem to be the prudent thing to do.

Also of note, we are pleased to report that in April 2013, we amended our credit facility and extended maturity date to January, 2016. We incurred a fee of about $700,000 related to this amendment and all of the terms of the credit facility, generally remained unchanged and a few changes here and there, but not a lot.

In terms of the portfolio evaluation at March 31, 2013, we had cumulative unrealized depreciation of about $93 million and increased about $7.6 million, the largest driver of the unrealized depreciation was about $7.1 million in Reliable Biopharma and March 2013, we acquired an interest in Reliable with an infusion of about $2 million in additional equity capital and we believe the company is now in a good position to grow. We are the largest shareholder there now.

It's important to know here that the accounting standards required by all evaluations are based on fair value that we might reasonably expect to receive upon the current sale of securities in an orderly transaction between market participants. And this cumulative unrealized depreciation of our investment that doesn’t have an impact on the current ability to pay distributions to stockholders, although it may be a good indication of future realized losses which could ultimately reduce our income available for distributions.

Before investments that we have left that are classified are non-accrual that are actually are non-accrual at March 31, 2013, at a combined cost basis of about $56 million or about 16% of the cost basis of all our debt investments in the portfolio; at a combined fair value of about $7.5 million or about 2.9% of the fair value of all the debt investments in the portfolio at quarter-end. There were no non-accrual investments added since January, 2012.

While the number of non-accrual investments is higher that is the amount is higher four is not too bad for a portfolio this big, but while the number of non-accrual investments is high than we consider acceptable; we are able to decrease the number of non-accruals over the past two quarters and we will continue to work to fix the four companies we have left. The remaining diligent and focused on managing our current portfolio, we feel we have been able to stabilize and improve some of our non-accrual companies which have sure resulted in unrealized appreciation of one of these companies during this past quarter.

We also believe the portfolio company quality has been consistently good, obviously, not before that we have, but the others have continued to get stronger; we generally limit non-cash sources of income specifically generated from paid in kind income or original issued discounts. These have represented less than 1% of our investment income over the last three years.

On the other hand, our investors have seen high levels of success fees as we call them as income recorded over the last several quarters particularly the $1.1 million earned in the first quarter of 2013 and combined total of $4 million earned during the fiscal year of 2012, all related to portfolio companies that exited from early payoffs and par during the period.

We didn’t earn any success fees during the past quarter ending March 31, 2013; success fees are contractually due upon the change of control of the portfolio company; generally through the sale and they are not recognized as income statement as the income received, until the income is received in cash. This type of income can be uneven and predictable as you have seen in the past and we are hopeful that during the rest of the year we will have a few more success fees.

As of March 31, 2013, approximately 39% of our interest bearing debt investments had success fees related to them; success fees have weighted average contractual accrued rate of about 2.6% of the portfolio and as of March 31, 2013, we had a current off balance sheet again contractually available to us at some point in time of about $12.9 million on our accrued debt investments. That would be owed if the company sold or the notice paid off. Due to their contingent near, however there's no guarantee that we will be able to collect all or any of these successes. We had good results in the past but that doesn't guarantee we are going to have it in the future.

We have continued to see increased competitive pressures in our marketplace and from investment companies in this marketplace for senior and senior subordinated debt which is our specialty, and this has resulted in lower yields for increasing riskier investments. So we've had to slow down some of our investment activity because of that. In spite of this increase in competition, we maintain a weighted average yield on our accruing investments of approximately 11.5% and for the last four quarters which doesn't include any of the aforementioned success fees or enhancements, but we continue to work hard to fill our pipeline of deals available to us. We have some solid deals in the backlog now and I think they will generate some good returns as soon as we can bring them to fruition and put them on the books.

The market for loans to companies at lower end of the middle markets which we seek to invest in our capital end is seeing much more competition, not so much from banks although they are becoming a little more active in the senior debt marketplace especially the term debt marketplace where we are in. Competition is generally coming from other public funds like ours and many smaller private funds, and we still think we have a good market opportunity that we will be able to show our shareholders some new quality deals over the next several quarters which will generation some solid income and we have a capital to deploy today for the right opportunities.

Before I go to our new CFO who is going to give the presentation on the income statement and balance sheet and those things; I would like to thank David Watson for stepping in as CFO over the last couple of years and taking on the added duties of CFO of Gladstone Capital. He will continue to be involved as Treasurer of Gladstone Capital, but we now have fully returned his attention to Gladstone Investment on buyout fund. I'm very excited to have Melissa Morrison, who has been our Chief Accounting Officer for this fund for past year and a half to be promoted now to Chief Financial Officer. This transition has been seamless and now I would like to hear from Melissa. So Melissa come on.

Melissa Morrison

Thank you David and good morning everyone. Yesterday we released our second fiscal quarter earnings press release and filed our Form 10Q which I hope you've had a chance to review. Starting with the income statement for our second quarter ended March 31, 2013 net investment income was $4.4 million or $0.21 per share as compared to the prior quarter ended December 31, 2012 of $4.9 million or $0.23 per share. This 9.2% decrease in net investment income was due primarily to a decrease in investment income of $1.4 million offset by a decrease in total operating expenses of $1 million. Investment income decreased in the three months ended March 31, 2013 as compared to the prior quarter primarily due to the large success fee of $1.1 million received in December 2012 related to an early payoff at par. There were no success fees earned during the quarter ended March 31, 2013.

Operating expenses decreased in the three months ended March 31, 2013, as compared to the prior quarter, primarily due to an increased in the incentive fee credit and also to a decrease in professional and other expenses related to receipt of certain reimbursable deal expenses in the current period. 100% of common and preferred stock distribution paid in the six month ended March 31, 2013, and over the last two years were covered by net investment income. This highlights our commitment to predict growth and building shareholder value. The focus of the Gladstone Capital Fund continues to be making consistent monthly distribution to our stockholder that will grow overtime.

Let’s turn to realized and unrealized changes in our portfolio. Realized gains and losses come from actual sales or disposals of investment. We had minimal realized activity during the second quarter ended March 31, 2013. Recording unrealized appreciation and depreciation is a US GAAP requirement to mark our investment to fair value on our balance sheet. With the change in fair value from one period to the next recognized in our income statement. Unrealized appreciation and depreciation is a non-cash event. From an unrealized standpoint for the March 31, 2013 quarter end, we recorded net unrealized depreciation of investment in the aggregate amount of 7.6 million. Our entire portfolio was fair valued at about 74% of cost as of March 31, 2013 as compared to about 75% as of September 30, 2012.

The cumulative net unrealized depreciation on our investment is largely attributable to investments made in 2007 and prior. Our bottom line is the net decrease, increase in net assets resulting some operations and is a combination of net investment income, net unrealized appreciation or depreciation and net realized gains or losses. For the March 2013 quarter-end, the net decrease/increase in net asset resulting from operations was a decrease of 2.8 million or $0.13 per share versus an increase of 8.4 million or $0.40 per share in the December quarter. The quarter-over-quarter change is primarily due to a large amount of net unrealized depreciation in the current quarter as compared to the prior quarter. While we believe our overall investment portfolio is stable and continues to meet expectations, today’s market move fast and are generally volatile, and investor should expect continued volatility and aggregate value of our portfolio.

Moving over to the balance sheet; as of March 31, 2013, we had approximately 285 million in total assets at fair value consisting of 267 million in investments at fair value and 18 million in cash and other assets. We had total liability of approximately $98 million consisting of $55.4 million in borrowing that cost outstanding on our three year line of credit $38.5 million in term preferred stock, which has a mandatory redemption feature at the end of 2016 and $4 million in other liabilities. In all for the quarter ended March 31, 2013 we had approximately $187 million in net assets as compared to $193 million in net assets as of December 31, 2012 and $189 million as of September 30, 2012. This represents a [nag] for common share of $8.91 as of March 31, 2013 as compared to $9.17 as of December 31, 2012.

As mentioned earlier, based on a recent extension of our $137 million revolving credit facility, the maturity date is now in January 2016. We have the ability to expand the credit facility to a maximum of $237 million due to the addition of other lenders. From a liquidity perspective at the time of this call we have about $65 million in aggregate and cash and availability on our credit facility. As noted in last quarters earnings call, in January 2013, we amended our line of credit to renew the LIBOR floor of 1.5% which reduces our cost of capital and allows us to be more competitive in the market place. We believe we have a safe balance sheet for a company like ours and we believe our overall risk profile is low.

We will continue to consider other financing sources, as necessary, if we feel we need more liquidity for future operational and investment activity. At this time we have the ability to deploy more capital for the right opportunities in line with our investment objectives and strategy.

Now I would like to cover some of our portfolio statistics. Our portfolio as of March 31, 2013, consisted of loans to 47 companies in 28 states and in 22 different industries. We target to have a portfolio mix of 95% in debt securities and 5% in equity securities, and currently our portfolio is adding 96% to 4% mix of debt to equity investment at cost.

We aim to have a diversified portfolio by industry classification and by geographic regions and are not too heavily invested in either one of these specifically nor are we invested too significantly in any one particular portfolio company. Our five largest investments at fair value as of March 31, 2013 totaled $86.7 million or 32.4% of our total investment portfolio as compared to the five largest investments at fair value as of September 30, 2012 which totaled $91.8 million or 33.5% of our total investment portfolio.

We are constrained in certain concentration limits in our portfolio by our credit facility as well as our regulated investment company test under the IRS rules, all of which we have historically met and continue to meet as of March 31, 2013. We continue to manage interest rate risks by targeting our portfolio to have approximately 10% of the debt investments at fixed rate with approximately 90% made at variable rate.

Our portfolio has consistently had a high concentration of variable rate loans approximately 89% as of March 31, 2013. These variable rate loans usually have a minimum rate or floor so that the effects of declining interest rates as we obtain over the last number of years are mitigated. And when rates begin to increase, we should see higher income.

All of our variable rate loans generally have rates associated with the one month LIBOR. The weighted average floor on our variable rate loans was 2.5% in relation to one month LIBOR. These loans had a weighted average margin of 8.9% resulting in an all-in weighted average of 11.4% on our income producing investments as of March 31, as compared to 11.3% as of December 31, 2012.

Our proprietary loans had an average all-in rate of 11.3% while our syndicate had an average all-in rate of 10.1%. The weighted average yield on interest-bearing debt investments in our portfolio has remained consistent over the last several quarters and was at 11.6% as of March 31, 2013, up from 11.2% a year ago.

In summary, we look forward to gaining some momentum into the second half of 2013, with new originations to replace the early payoff activity we have recently experienced in order to increase our income generating assets. And with that, I will turn the call back to David.

David Gladstone

All right, Melissa. Good report, I hope all the listeners will read our press release and review our quarterly report, that’s on Form 10-Q which was just filed with the SEC. You can have access to the press releases, 10-Qs on our website and also on the SEC website.

I guess the big news here is we had some production in our portfolio quarter but mostly focused on our existing portfolio of companies. The portfolio yield still remains above 11% quarter-over-quarter and April 2013, since the quarter end, we exited one non-performing loan and finally took the hit there. Also subsequent to the quarter end, we were able to extend our line of credit to maturity in January 2016.

I think our biggest challenge today is the access to long-term capital markets that low rates. We have a great line of credit supported lenders there and the line of credit is working fine. We believe this is sufficient for our near-term needs and we can always add people to it if we seek to need more for the revolving line of credit, but in order to make long-term investments, we really need to raise additional long-term debt or long-term capital some course, so such as in November 2011 when we issued the preferred stock.

For our portfolio of companies, [we’re worried too]. They don’t really get a long-term senior loans at cheap rates and there is a fair number of regional banks that make new loans based primarily on the assets of the business of these asset-based lenders or much more plentiful, and they were even last year and certainly up from years ago, but the banks are just not extending long-term fixed rate or long-term even variable rate. And I think the banks are coming along and they will be better this year for our small businesses but still are lacking.

We see the economy out there today is still not strong. We see worldwide Japan and Europe both teetering trade deficits, with China still bad, some feel China is on the brink of its own debt crisis especially in the building sector, but they continue to subsidise their industries to disadvantage of our businesses here in the United States and they have subsidised their oil prices significantly and this means our companies can't compete and just sends jobs overseas to Asia and takes them away from us.

Oil prices continue to be a risk to the economy, really high gas prices for cars and trucks hurts every business in the United States because things have to be delivered. I think inflation is on the way, the government keeps printing money, the only reason we have not seen a big inflation and turmoil in the global economies. The people all over the world are buying U.S. bonds that we are printing here in the United States; mainly they see that is the safest place on the earth.

And the spending by the federal government has just continued on sustained just crazy, the federal deficits over $16 trillion now and rising at a still rapid, very rapid rate and the federal government is now borrowing more than 45% of every dollar spend and it may be as high as 50% by the time we get to the end of this fiscal year which ends in September for the government.

Political conflicts in general federal government affects the U.S. economy and the recent sequestration period is an example of how it's going to affect government’s spending not much going on there in terms of government spending in terms of our portfolio company. So we’ve not had much to worry about there.

We have seen taxes go up on all U.S. workers in the United States and many types of companies investing or just waiting to see how ObamaCare and all these other payroll tax increases are going to affect them. Many people are going to part-time employees rather than full time, I think there is still a lot of dislocation out there. We are trying to figure out which way the world is going and in terms of growth or no growth.

Unites States now has the highest statutory corporate tax rate upon all the advanced economies with 39.1% higher than both Japan, United Kingdom. They have recently their rates. So this higher tax rate is one reason companies are outsourcing jobs outside the Unites States and that just hurts all of us here in the U.S.

Unemployment in the U.S. is just far too high. The number is used by the government, don’t include those who are working part-time but seeking full time and it really doesn't do anything for those who have stopped work and many of those who are just sitting on the side lines.

More realistically the unemployment rate is probably between 15% and 18% in the Unites States if you count all of those, and these all issues affecting the investment climate that we all operate in. And in spite of those negative, some parts of the industrial base in the U.S. not a disaster. Like most companies some of our portfolio companies have not seen increases in revenues or backlog. However, some others are seeing good increases and the few others are seeing great increases. It’s a very uneven economy as we look out and see those things.

The distributions we have continued to make the monthly distribution. On April 2013 our board of directors declared the monthly distribution of common stock to common stockholders of $0.07 per common share per month for April, May and June and board will meet again in July to consider July, August and September.

Through the dates of this call, we made about a 115 sequential monthly cash distributions on our common stock and we did several quarterly distributions before this. This is all important; it’s the real reason for Gladstone Capital to exist. These distributions that we do to shareholders are how we believe the best way to run the company. And this differentiates us from some of the BDC stocks out there as well as other dividend paying stocks and especially those that don't pay dividend.

The current distribution rate for the common stock and common stock price is about well based on yesterday’s stock price of $9.27 and the yield on the distribution is about 9.1% which is an extremely high rate for companies such as ours. Our monthly distributions at 7.125% for our term preferred stockholders and that's a wonderful monthly dividend of about $1.78 annually and the stock price on the term preferreds have been over what was offered at so those people who bought on the offering at $25 is now trading at $25.53 and a good strong 7% yield if you are buying that.

So in summary I think we are moving forward. We are not moving forward as fast as I would like and we are pushing now. We have reorganized a little bit internally and we now have teams and the team that we have with Gladstone Capital is very strong. And we believe this fund will have a great opportunity in the future and we will just stay the course, continue to be conservative and disciplined in our investment approach while striving to deliver shareholder value to those of you who own the stock.

We’re always happy to talk to stockholders and I wish we could do this more often and with that I am going to stop and turn it back over to the operator for questions at this point in time.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Troy with KBW.

Troy Ward - KBW

Just a real quick, can we get an update on Reliable Biopharma; I know you said you put an extra $2 million in that and its now a controlled company. Can you let us know what percentage of ownership you have of that now?

David Gladstone

Yeah, I don't know the percentage over the phone I am sorry I'll get that for you; but we are in a control position as I mentioned. I am trying to remember the name actually, I probably shouldn't say it, anyway the sponsor there decided that they were up against some limits inside of their company and couldn’t put anymore money and company stumbled a little bit mainly because two of its big customers were a little bit slow and had some problems with the FDA, but they are now back on track and I think this company will come back very strong and that was the reason we wanted to put additional money and make sure it went forward.

They have a good backlog and they are doing well. It’s just; it was a temporary change because of their customer base had some changes. The FDA has become much more difficult to deal with now in terms of quality controls as we've all read in the newspaper there have been some really horrendous quality control problems. But Reliable did not have those problems, but some of its customers did and so its customers had to slowdown some of its purchases, but the company is back on track now and I think you will see some significant appreciation over the next year or two years.

Troy Ward - KBW

And I think the private equity firm is public, who did this, had opportunity, are they still the ones in there?

David Gladstone

I think that's true.

Troy Ward - KBW

Okay. So my question is, if you look at your, I mean this is the largest investment in your portfolio about 9% of the portfolio on a cost basis. You have a senior sub-term debt that looks like you have marked to zero. Is that still accruing to 12.5% interest?

David Gladstone

It is. We're still accruing because what happens when a company has financial problems even if it's not due to their own problems internally, you have to mark down process that goes on now. It is extremely complicated. The auditors and the government have become fixated on trying to determine real values of private companies, which I mentioned briefly that they take a very short-term view; what could you liquidate the company for in the next three months, six months and as a result of that, you get very low numbers when the company stumbles. But I think you will see that rise pretty dramatically over the next couple of years, simply because the company is coming back very strong and the people are good folks there. You got a good management team and a good marketing team. So I think this will pay big dividends for our shareholders as we go forward.


(Operator Instructions) We have a question from J.T. Rogers from Janney Capital Markets.

J.T. Rogers - Janney Montgomery Scott

I had a question on precision acquisition. It looks it matures in March of 2013 as I am reading the schedule of investments rate; I was just wondering what was going on with that investments?

David Gladstone

We're talking to them. They don’t have enough money on hand obviously to pay us all. They probably wouldn’t be even talking about it if they could, but we are renegotiating the loan and we will term out some of that. Quite frankly I am glad to have it mainly because it's always so far and difficult to go find another good investment. They will probably be able to pay down some of it overtime. But we like precision and I think that one will continue to pay interest income that we can pay out of dividends.

J.T. Rogers - Janney Montgomery Scott

Is there any opportunity restructured or since there past due, do you got fees and other associated income from that potentially in coming quarters?

David Gladstone

You do, and the biggest problem and you always hear people talk about being able to restructure deals and get fees never been a big fan of taking huge fees from companies that just because of the economy happens to be in a more difficult circumstance, precision is not in that case but I think precision overtime will continue to grow and prosper and it just takes time to get there and this is one of the company that’s continuing to go along at a pretty good pace.

J.T. Rogers - Janney Montgomery Scott

Well, alright and then I think you guys mentioned reimbursable deal fees during the quarter that reduced your professional expenses, just wondering what those work if you could put a number on that?

David Gladstone

Melissa, you have what we had on the reimbursable deal fees, I don't remember these numbers, I happen to be sitting in New York unfortunately. Go ahead Melissa.

Melissa Morrison

That’s okay. We had approximately about 200,000 in a receipts on some reimbursable deal expenses. So that actually we reversed the allowance for doubtful accounts, which reduced our other professional expenses this quarter.

J.T. Rogers - Janney Montgomery Scott

And then just one last question, you guys mentioned increased competition; I was wondering what you saw as general deal for doing the first quarter and then where rates and leverage are trending for middle market companies?

David Gladstone

I think if you look at any of the lending institutions from banks all the way down to us, there has been a slow down in demand for money. Businesses are still trying to figure out which way the world is going in terms of their economies and they are just somewhat frustrated by all of the new taxes, the new implementation of the Obamacare. So you’ve seen a lot of people kind of take a deep breadth and say I am going to sit on things and see how things shake out and see what’s going on before. I borrow more money and continue to grow. And we have seen that, I think the small business community is not exempt from that at all.

There are of course still demand for loans and still going on. We have seen changes in rates pretty substantially move down from, I would say the 11% and 12% range to pretty consistent 10% as a request for loans at that rate. And the syndicated loan market place, we have seen it go from 10% or 11% down to 8% to 9%. So there is a decrease in rates as lenders have sort out good borrowers. I think its still the difficult borrowers are having to pay up or even refinancing have to pay up pretty substantially, and its just a difficult market place from that perspective.

We have a very large reach and we have of course people in California, Chicago and New York in our main office in Washington DC. We see in a normal deal flow and sometimes surprised when I read the public documents of some of the people in our business and see some of the deals that they have done and the rates they have done and when we've seen the same deals and turned them down, that's not to say that they are wrong and we are right, its just that we just have a different perception of risk and reward when we put them through our risk reward basis and who knows they may have done exactly the right thing, given this climate and may come through the other side looking really good.

We have been very judicious in what we are willing to do and not do, and I think as a result we will pay dividends going forward at a much better pace. I hasten to remember the last recession only because we had to sell off so many assets to pay down our debt and all of those good assets that we sold off, paid off as agreed and of course we were left with our less desirable ones at the time. I don't want to ever be in that position again and so I think we are with the bankers that will stay with us through the next recession and if they don't we do have a good amount, I think we are over $60 million worth of syndicated loans that we could probably exit and get out of maybe at a discount but right now they are trading at a premium, if we had to. So we are still playing it pretty safe given the tenacious nature of the economy.

J.T. Rogers - Janney Montgomery Scott

And just one last follow-up question if I could; you are talking about lower business activity given uncertainty, what about private equity sponsors, do you see them gearing up for increased activity.

David Gladstone

Well, it’s certainly raising substantial amount of money. The buyout Bio funds are continuing to raise a lot of money, but this raising is primarily in the larger buyout funds. Though I would expect that would translate into larger acquisitions from a public companies taking them private I think it will also impact funds that and this is LBO funds that bought something five, six, seven years ago have now got them back to working order and are selling them to somebody who has raised a new fund. So as a result there is these fund to fund transfers as I call them from one LBO fund to another as companies, as funds need to exit and liquidate they tend to sell them to other funds.

There isn't a big public marketplace to take any of these out these days. I know that's affecting the high technology marketplace pretty dramatically as there's still just not a robust area for people to do offerings unless they are big companies with well-known names, which there aren't that many of those.

So from our perspective, there's a slowdown in terms of the amount of deals that are getting done, that are new transactions, the sort of swapping around we see a lot of that. The syndicated loan marketplace is the place they go for their senior and sub-debt, that's very active but very, very low rates there. It's not where we are going to be able to get a lot of our activity. And so we are left working with some of the sponsors that we like very much, the mid-sized and lower-sized and buy out funds that need senior and subordinated debt.

And when they come to us, they are coming to us asking us to fulfill the right hand side of the balance sheet. And that's what we do. And sometimes we co-invest a little bit of equity with them, but our goal is to continue to do that. We have one transaction coming up that I hope we can close this month, say this month I mean in the May timeframe, sometime that will be a very nice transaction that I think we got a great rate at and we've got another one behind that one. So hopefully, those two close before June and we can show some good activity for the June quarter.


We do a follow-up from Troy Ward with KBW.

Troy Ward - KBW

Real quick to follow up on [JT’s] on precision acquisition. Just looking at that, it looks like it's marked at $0.83 on the dollar. Can you first comment on that and then comment on as a -- I understand you don’t want to hit a company with fees too often, but as the lender here, I mean you have a responsibility to protect your position and would you consider taking equity and something like this in order to refinance, I mean? And in the current environment, I would think that you talked about how aggressive some lenders are, why can’t this get refinance if this company is doing okay?

David Gladstone

Well, I think it can get refinanced at rates that perhaps prohibitive for them and we know these guys, they know us, we like working together. So as a result, I think this one will get refinanced at a market rate. Whatever that means these days in terms of its ability to go on and get refinancing, I think they could get some pretty good senior debt and they would want subordinated debt below that and we're in a good position to do that. So we will work with them, get them through this period of time and hopefully make a lot of money for our shareholders. And again I am not putting precision in the workout category by any means and I think they are coming along as many companies are in this day and age.

Troy Ward - KBW

And in the industry, just as machinery, can you tell me what they make or what they sell or what they do?

David Gladstone

Well, out there, precision manufacturing, you come in, you want something made and they are able to make it for you. They are partially integrated with some of the truck manufacturers. They are partially integrated with some of the more industrial machinery. And so they are in that mix. So as you see these pieces of machinery getting sold, this would be a company that would be providing parts to those who are assembling and putting those together, they would be in that business. They have got a wide list of customers. There isn’t one big dominant customer that they are into.

Troy Ward - KBW

Okay, thanks, David.


(Operator Instructions) All right, there are no more questions at the present time. So I would like to turn the call back over to Mr. Gladstone for any closing remarks.

David Gladstone

All right. Thank you all for tuning in, sorry to be a little bit hasty on working the marketplace. And if you have any questions, you can always e-mail them and we work hard to answer them as best we can. That’s the end of this conference call.


Thank you. The conference has concluded. Thank you for attending today’s presentation. You may now disconnect.

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