Gladstone Investment Corporation Q3 2009 Earnings Call Transcript

 |  About: Gladstone Investment (GAIN)
by: SA Transcripts


Greetings, and welcome to the Gladstone Investment's third quarter 2009 earnings 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 Investments. Thank you, Mr. Gladstone, you may begin.

David Gladstone

Thank you, Claudia. That was a nice introduction and hello and good morning to you all out there. This is David Gladstone, Chairman and this is the quarterly conference call for shareholders and analysts of Gladstone Investment. Trading symbol is GAIN thanks all for calling in. We're always happy to talk to shareholders. I would like to do this more often and unfortunately we can't but if you're ever in the Washington DC area, come by and see us. We're in McLean, Virginia, a suburb of Washington DC. So please stop by and see us. However you may want come by on the better day than today. We've got some pretty bad whether here with lots of snow on the ground but if you do come by you'll see a great team at work and I just 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 certainly believe those plans are reasonable.

There are many factors that may cause our actual results to be materially different from any future results that may be expressed or implied by these forward-looking statements, including those factors listed under the caption, Risk Factors, in our periodic filings such as 10-Ks and 10-Qs that we filed with the Securities and Exchange Commission and both can be found on our website at, and also at the SEC 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.

First we'll hear from Dave Dullum, our President and he is the president of the company. He will cover a lot of ground including a view of the future. Dave, take it away.

Dave Dullum

Thanks David and good morning all. As a review our business objective for GAIN continues to be as an investor principally in buyer transactions of lower middle market companies with their management teams and their private equity sponsors of products that generally are mezzanine or junior debt instruments combined with an equity investment in common stock or preferred stock or with warrants to buy common stock. This approach allows us to be focused on primarily generating current income for dividend distributions and realizing capital gains to enhance the overall returns to our share holders.

Our capital facilitate the private equity sponsors and the management team in their efforts to achieve the necessary leverage for a buyout transaction. We may also find opportunities to provide capital in support of business owners and management teams who are not seeking to sell their company outright, but to achieve some partial liquidity through a recapitalization of their business or where they have a need for capital to strengthen the balance sheet or growth.

In this regard, I believe we are in a favorable environment for other type of financing due to availability of asset-based and banks senior term loans continuing to be a challenge for private equity sponsors in these leverage transactions. These structural circumstances that I've described do extend the need for the junior debt and mezzanine tranche is indeed what we provide.

We'll turn now to our buyout activity. For the quarter ending December 31, 2009 we committed to a new investment totaling about $1 million in A. Stucki for an add-on acquisition and re-facilitating the add-on acquisition in Chase Industry. Both of these companies are existing portfolio investments. There were no exits from the buyout portfolio and we continue to plan ahead and are analyzing opportunities to recapitalize or exit from select portfolio companies at the appropriate time.

We previously reported that one of our control buyout portfolio companies had signed an agreement with an investment banking group to review its strategic options. This process indeed is ongoing and as required we will report if there is a material event. Since this is a private company that we're referring to, we cannot disclose the discussion here and there is also no certainty at this time in the outcome.

During the quarter, we received approximately $4.5 million of principal repayment from companies in our buyout portfolio and we disclosed approximately $595,000 to these companies. During the quarter, one of our portfolio company's re-changed holdings, refinanced our line of credit with the third party and we received full payment on the outstanding balance of $3.5 million.

We also entered into an agreement with Danco, another portfolio company to reduce available credit limit from $3 million to $1.5 million. Another company A. Stucki, recently mentioned declared and paid approximately $953,000 in dividends on a preferred stock investment that we had in this company. This is equivalent to approximately $0.04 per share.

Finally through disbursement of approximately $282,000, we bought out the shareholders and assumed a 100% ownership of Matthew Investments Inc. which is another one of our portfolio buyout investments. Subsequent to the quarter end, we extended to May 20 our revolving credit facility Noble Logistics which was previously due to expire in February of 2010. We continue our efforts to refinance lower yielding debt obligations and to pay down our line of credit thereby reducing our interest costs and strengthening our earnings per share.

Turning to our syndicated loans, during the quarter ended December 31 we received scheduled principle repayments of approximately $27,000 from the remaining loans. We also completed the sale of certain senior syndicated loans HMTBP acquisition through a portion of interstate fiber. These loans in aggregate had a cost of approximately $6.8 million at an aggregate fair market value of approximately $5.5 million. Upon settlement of these loans we received approximately $5.5 million and recorded therefore a net realized loss of approximately $1.3 million. As we have mentioned before we plan to longer invest in syndicated loans and we will continue to liquidate the three remaining as appropriate.

Turning to the status of the fund, at the end of the December quarter we had $213.7 million invested in buyout debt cost and $12.2 million invested in a three syndicated and one non syndicated loan, our total portfolio cost of approximately $225.9 million. Regarding our credit facility we continue to pay down our line of credit with BB&T and Key Bank and currently have about $15 million outstanding on the line with $33 million available for new investments and other capital means. We will continue to reduce the line as appropriate and our now in a position to utilize the facility to invest in new transactions which we are actively speaking.

Regarding an update on the portfolio since our inception in July 2005 we have completed 13 buy out investments for total of approximately $265 million in cost with no capital gain exists. The companies in our buyer portfolio continue to whether the current economic environment and are performing well considering the circumstances. We do have refused specific companies that are under performing, so our portfolio management activity which is a strength and important part of our investment management approach of working to limit losses and preserve cash flow for our portfolio companies is focused on an indeed is working with this companies.

This portfolio management team continues to provide value added services such as strategic in business planning and this is where we work with outside resources to assist these companies and continuing to review their competitive positioning and talent resources among other key business metrics. Secondly, operating management support, this where we can tap experienced operating management talent on staff or from a pool of talent we have cultivated over the years.

Third, we facilitate interaction between the portfolio company management teams which allows to exchange of ideas such as best practices, purchasing and manufacturing disciplines all of which are extremely important in this current economic environment. Henceforth we can provide expertise within our team and such as negotiating the leases on the property occupied by portfolio company.

The important point on all of this management capability really is that this is not a typical workout group which takes over after the company has defaulted or is slipped badly but these are experienced operating resources that work with the portfolio company management and our equity sponsors to improve the company’s operations and viability. This really is extremely important in these challenging times and adds value to our portfolio as we do not see aggressive defend our lender rights at the risk of damaging our business in future but to be a very good partner not only for management but also equity sponsors and our lenders in those various companies. We take a long term view as a result.

Turning to the market place as we would see it for the smaller companies that in our preview. It continues ready to be defined by two key factors, first the economy and second the lending limitations. Regarding the economic conditions they continue to limit earnings in cash flow of the lower middle market companies though we are starting to see some profits and stability. Therefore business owners are either delaying the sale of their companies, seeking partial liquidity through dividend recapitalizations or seeking junior debt capital and equity perhaps for balance sheet improvement.

Secondly senior debt is mentioned is principally asset based with limited supply of cash flow loans, therefore it is difficult for the buyout funds to raise the necessary leverage capital for individual deal. The result is one valuations relative to EBITDA which is how we look at it, have declined.

As a point of reference we have seen trailing market deal multiples for companies with enterprise value of less than $50 million decline from a high of around 10.4 times in the third quarter of 2008 for around 6.5 times in EBITDA in this quarter ending in December 2009. Secondly the private equity firms, as we mentioned before continue to have to invest a large amount of equity relative to their capital structure. And finally, the opportunity for [melting in] an equity co-investment has grown to therefore fill this gap between the senior lenders and the equity investors.

How does this affect our pipeline? Well these factors are to our advantage as valuations are more reasonable. Overall leverage is lower, and there is greater demand for the junior or mezzanine debt. We're experiencing an increase in the flow of both the quality, ennumber of new opportunities for mezzanine and equity co-investment, and while we continue to worry about the economy, we will be diligent in our pursuit of new investments. And that may limit portfolio growth, though we do hope to make [few new] investments in the next two quarters.

To our outlook, the goals continues to be the maintenance and consistency of our distributions to shareholders while achieving solid growth in the portfolio of proprietary investments in this lower middle market buy out section that we compete at. And David, that concludes my part of this presentation.

David Gladstone

All right, thank you for that great report Dave, we're excited about the future. Now let me introduce our new CFO, David Watson. He is received a lot of help from one person Lewis Parrish and Lewis has been incremental in bringing this financing, this reporting for financing and to where it is today. David Watson came on a couple of weeks ago and baptism by priority will come along right at the time of the report. Now let's turn it over now to David Watson. Go ahead.

David Watson

Thank you, David. We will begin with our balance sheet. At the end of the December quarter, we have approximately $278 million in asset, and $15 of $187 million investment fair value and $91 million in cash and other assets. Included in the cash and cash equivalent is approximately $85 million of U.S. treasured securities which we purchased for the use of all funds on our line of credit and a $75 million short term loan at quarter end to satisfy our asset diversification requirement for regulated investment company status.

Immediately after the quarter end we sold those bank securities and we paid the short term loans and we paid our line of credit of our funds used in the transaction. Therefore as of December quarter end, we had about $27 million borrowed on the line of credit, $75 million borrowed to use as short term loan and had about $175 million in that asset.

So we were less than one to one leveraged on our senior secured filings. We had a net asset value of $7.93 per share. This is partly related to the depreciation of the aggregate investment portfolio over time. Currently we have approximately $187 million in investment at fair value, cash approximately $2.1 million and $15 million outstanding on our line of credit. We believe this to be a [date] balance sheet for our company wide (inaudible) and we believe our overall risk profile is low.

Regarding our income statement, for the December quarter end total investment income was approximately $5.9 million versus $7 million in the prior year quarter while total expenses including credit were approximately $2.8 million versus $3.4 million in the prior year quarter leaving net investment income which is before appreciation depreciation gains and losses of approximately $3.1 million versus $3.6 million for the quarter last year, a decrease of about 14%. For the nine months ended December 31st, total investment income was approximately $16 million versus $19.8 million in the prior year period.

Our total expenses including credit were approximately $8.1 million versus $9.1 million in the prior year period reaching net investment income of approximately $7.9 million versus $10.4 million for the prior year quarter, a decrease of about 24%. The primary driver of the current income versus the prior years income, both for three and nine month period ended December 31st was due to the loss of income related to our previously held senior syndicated loan, a majority of which was sold during the first quarter to retain our old credit facility with Deutsche Bank. We did have a lower expense to offset some of the loss to income from the ones we sold but not that much because the rate of interest on the new line of credit was much higher.

Let's turn to realized and unrealized gains and losses. This is a mixture of appreciation, depreciation, factual gains and losses on our investment. Said another way, net realized gains and losses are from cash, due to sales or disposals of investments. Net unrealized depreciation is recognized in out statement of operations of non cash accounting from the change in fair value from the portfolio during the quarter. For this December quarter end, we recorded realized losses of $1.3 million from the sale of one senior syndicated loan and a portion of another. Due to the sales of these loans which had a aggregate cost basis of approximately $6.8 million, we have received $5.5 million in net cash proceeds.

For the December quarter end we had net unrealized depreciation of approximately $6.2 million over our entire portfolio. This was driven by approximately $8.2 million of unrealized depreciation from the equity components in our controlled investments. As multiples come down on the prices paid for company we have to use a lower multiple to value our portfolio and it had an impact on our portfolio valuation. While this is non-cash, it comes from the value placed on the portfolio.

Although our aggregate investment portfolio has depreciated, our entire portfolio are currently valued at 83% of cost as of December 31, 2009. The unrealized depreciation of our investment does not have an impact on our current ability to pay distribution to stockholders but it does indicate that the value is lower and there may be future realized losses as it ultimately reduce our distributions.

One note on our valuation process, we have continuously used market bid prices for our remaining syndicated loans in our portfolio at December 31st, 2009. These syndicated loans comprise approximately 3% of the fair value of our investment portfolio. Now let's turn to net decrease and net asset from operation. This term is a combination of net investment income, unrealized net appreciation or depreciation, unrealized gains and losses. Please note that we are talking about weighted average fully diluted common shares when we use per share numbers.

For the December quarter end, this number was an increase of $4.4 million or $0.20 per share, versus $3.9 million or $0.18 per share in the prior year in December quarter. A year-over-year change is primarily due to the loss of income related to the number of syndicated investments held at December 31st, lower interest expense and margin net unrealized depreciation from our investment portfolio. While we believe our overall investment portfolio is stable and continue to meet expectations with the continued investor uncertainty and the current economy and credit markets, investors should expect continued volatility in the aggregate value of the portfolio.

Our average loan ratings for the quarter remained relatively unchanged. Risk rating system we use set our originated loans at an average of 5.8 for the quarter, which is up slightly from the September 30th quarter. The risk rating for unrated syndicated loans was an average of 6 for this quarter, a decrease from the average of 7 from the September 30th quarter.

Our risk rating system gives investor a probability of default rating for the portfolio with the scale of 0 to 10 with 0 representing a high probability of default. We see the risk in this portion of the portfolio staying relatively the same as prior quarters. As for our rated syndicated loans, they have an average of rating BB2 in the quarter ended December 31st unchanged from last quarter end.

Historically, we had concentration of variable rate loans in the syndicated markets, but we've sold all the due syndicated loans. Some of our buyout loans have variable rates but we almost always have a minimum or a floor in the rate charge so that if interest rate decline, it will minimize impact our availability to make distribution and we purchase an interest rate cap on $45 million of debt on our new credit facility, in order to have some protection on our cost of funding, if interest rates rise.

We've about $150 million head cost on fixed rate loans or rate with a fixed floor all in our buyout deals. In other words, approximately 83% of our investment had fair value, have a floor for our pick they are also at relatively high rate, so we should be okay with that.

We have adopted the statement of financial accounting standards number 159 to the fair value option for financial asset and liabilities, which is also now known as [AFBA-25] under the new accounting standards certification rules for our credit facility. AFBA-25 required that the company apply a fair value methodology to the credit facility. For this quarter, the credit facility has been fair valued by independent third-party at $26.9 million and unrealized depreciation up $45,000 has been recorded for the three months ended December 31, 2009.

Since this depreciation of our debt it means that the network of other funds went up by $45,000. Please note that for the nine months ended we are still in a net unrealized appreciation position of $133,000. We would like the fair value of the asset and the liabilities that our balance sheet to get full disclosure to our shareholders.

As of December 31, 2009 we do not have any loans with paid in time income original issued discount income. Fixed income would result in recording non-cash income from which we would have to distribute out to our shareholder under tax. In essence we would have to borrow money to make a distribution to our shareholders because we do not receive any cash from our fixed income. We avoid gain in an unsustainable situation impacted results from fixed income. Currently all of our portfolio companies are paying on time and as agreed with the exception of one proprietary loan ASH Holdings Corp. our best company in Phoenix. This concludes my presentation.

David Gladstone

Alright, thank you very much David and thanks to you and Lewis for the work that you did this quarter. That was a good summary of the financials and I do hope each of the listeners will read our press releases and also obtain a copy of our quarterly report called the 10-Q which was filed with the SEC yesterday and you can find that on our website at and you can also find them on the SEC website.

I guess the big news this quarter after the quarter end was that we recovered from the difficulties cause by Deutsche Bank and in order to pay them of we have to sell a lot of our performing loans and this cost to have less income and reduce our dividend but because of the market place, the loans were so low at the time we had to sell. We had to sell the performing syndicated loans at heap discounts and that caused us to a have loss and reduced our net asset value.

Very disturbing time we are happy with our lenders BB&T and Key Bank, both said they would lend us some money to help us pay down the loan and we needed to payout Deutsche Bank which we will have that behind us. We do have a good relationship with them and I think it will help us build our business but now that the Deutsche Bank problem is behind this and we are re building our line of credit by talking to other lenders I think things are looking good for us to find ways to grow on asset base again.

We are working with BB&T as the lead bank to extend our line of credit, investment due in April of this year and while its not completed, not a completed deal we do expect to have this renewal, after all we only already $15 million at this point of time.

At this time we are also looking for long-term debt, we are working with some of the insurance companies and hope we can get some credit there we need some long-term credit on the balance sheet and we are getting to know this area much better than before and expect to have some success in 2010. That’s all I can say at this point, stay tuned and hopefully we will have some announcement as the year goes on.

We continue to worry about the cost of things specially oil and because we believe that it will go up again as the economy become stronger and United State is much to depended on foreign oil we need to increase our domestic use of other energies sources such as coal and natural gas and nuclear. Trade deficit with China continues to worry other countries.

At the end of the day China subsidizes their companies in their country and they sell the products to us under the free trade agreement. In that sense China has destroyed thousands of businesses in the United States and caused the loss of many jobs and it is so difficult to watch the U.S. jobs get a sense of China and other Asian nations. And now China is not even behind our gas. They’ve stopped buying our gas and at this point in time well and we are having some kind of trade war with them and try to get our jobs back.

We are worried about inflation. This comes from printing so many treasury bills in the last eight years. The government sold about $5 billion if treasury bills in 2009 and 2010, projecting the sales of our two trillion of key bills. Folks, inflation is coming and the dollar will decline in value and this is going to hurt a lot of people that are on fixed income. After all we still import a major amount of all of our products and services and the dollar's evaluation will hurt all of that in terms of buying power.

The amount of money being spent in the wars in Iraq and Afghanistan is also hurting the bankrupt. Soldiers that are fighting these wars for us are just wonderful. We support our troops and all that they do for us. After all they lay down their life for us. They are the true heroes at this time. However the war is draining our economy. We hope it ends soon. Even worse than all other things I've have been talking about is the pork barrel spending in our federal government. I believe they are acting irresponsible. The government is spending trillions of dollars on wasteful projects. The so called stimulus package that has come out has just been filled with projects that don’t create a single job and just benefit someone in a state or locality that's represented the Congress.

The state and local governments on the other hand are still in shock. All of their tax income is down dramatically. They are not spending like they did before and my guess is about 40 states are having severe budget problems and we may have a couple of states who actually take bankruptcy as a way to solve their problems. Of all the money being sent, very little of that money is being aimed at small businesses and this is a tremendous, tremendous mistake. Small businesses create about 80% of all the new jobs and the spending that's going on is missing the opportunity to stimulate small businesses. They Congress say that they're going to help small businesses but they almost never do. We really do need term limits on Congressmen and Congresswomen so that we can get a new key amendment in Congress and hopefully start creating jobs.

The stimulus bill they passed will probably not create a single long-term job. It's just propping up the old one off businesses that are out there and we really do need a big change in Congress. In other ways the U.S. economy continues to remain viable. As long as businesses are not related to housing or autos or financial institutions then that business is avoiding the traumas endured by those industries. But all the industries have suffered due to bad acts of a few and even though the entrepreneurs and many small business owners and other savvy managers have kept their cost low, they still suffered a decline in sales.

We all know there is a terrible slowdown in the economy and we're seeing it in our portfolio of companies and as well as the businesses that have shown up on our doorstep looking for financing and all of them have the same problem. Their backlogs are way down and their sales are way down and they've had to cut costs in order to keep their profits up.

It will take some time to get through this difficult recession. I remember the one in 1990. It took about three years to work our way through it. And we are very lucky that so many of our portfolio companies are still doing well. It is a testament to their tenacity and strength and I can just tell you a good entrepreneur is worth a 100 bureaucrats telling people what to do.

Employment is worse than we had ever forecast. We never imagined it was going to this bad. And while the government is reporting that the percentage of out of work people is going down, the government is really not counting so many people that have given up that are not even trying to find jobs now and they're certainly not counting the part time workers that would like to work full time and those in jobs of lesser income that would like to move up. I think the figure is more like 50% unemployment.

I do think we're near the bottom. We're starting to feel like this is the end of the recession and that time has come for us to move back up. But it may take another six months or so to reach bottom. But we are near the bottom now and this is an excellent time to buy into good stocks and good companies and that’s what we are trying to do. I think your company and our company will do fine in the future and especially in the near future.

Our distribution is declared by our board of directors in January with $0.04 per month per share. That’s for January, February and March. This is the run rate of $0.48 per year. Our banks are requiring us not to pay out more than our earnings in order to preserve capital. So now we obviously have to get busy and continue to grow the assets in order to get the distributions back up.

At this distribution rate and with the stock prices of about $4.92 yesterday, the yield is extremely high between 9% and 10%, almost 10%. We don’t have any plan to reduce the distributions, we are in good shape to continue our distributions and I think all of you can take solace in fact that we are at bottom and we are building from this position. This certainly means that the buyers are stocked; they are getting fabulous return and as all of you know are continue to dividend reinvestment in our shares. Please go to our website and sign up for email notifications, we don’t send out junk mails just news about your company, at is the site and you'll see the section that says click on the area that you want to put in your email so that you can get the notifications.

In summary as far as we can see the rest of the calendar year 2010 looks certainly much better than 2009 but folks we can only see a couple quarters ad up so we want to be careful. We are after all stewards of your money I think the worst is behind us and we can now look to begin building we are out looking for new transactions to put on the books. And I think we will find the couple and hopefully have some good announcement for u. Now the operator will come back on we will have some questions from the analyst and our shareholders and we will do our best to answer them.

Question-and-Answer Session


Ladies and Gentlemen, we will now be conducting the question-and-answer session. (Operator Instructions). Our first question is coming from Vernon Plack with BB&T Capital Markets. Please state your question.

Vernon Plack - BB&T Capital Markets

David I am not sure if I missed this but could you talk a little bit about asset quality. I didn’t see and I haven’t had a chance to look at the [cued] were there any additions to non-accruals or removal from non-accruals?

David Gladstone

No, we pretty much remained the same. Our one problem deal is [west] company and we are working with P&C who is the senior lender there and hopeful that we will have some good results this quarter on that. But everything remains the same.


The next question is coming from the Jon Arfstrom with RBC Capital Markets. Please state your questions.

Jon Arfstrom - RBC Capital Markets

Couple of questions for you. You talked a little bit about trying to get some longer-terms then employees for the company. And I know you are still maybe in some negotiation with (inaudible) stages. But what's possible in terms of the term that you could possibly get to something like that?

David Gladstone

Yeah, I can only speak in general terms because we don’t have a commitment from anyone. But generally speaking we are hearing people talk about single digits and I am reading that to mean somewhere between 7% and 8% long-term. Three years would be what we would expect but we might get up to five years. I know some of the larger business development companies have enabled to develop from long-term lending. But we are little bit smaller and it will take a while for the insurance companies to get around us but we are talking to them. We are actively we have engaged some folks to work with the insurance companies than we have been in contact with and I am hopeful that this year we will have an announcement on long-term debt and be able to continue the growth in asset.

Jon Arfstrom - RBC Capital Markets

Okay. That’s fair and then just a question on your comments on inflation, I think that probably the number one fear most investors and histories that you approached running your business in terms of how you invest and how you manage the company with some of these in terms of the horizon?

David Gladstone

Yeah. And this company we're in relatively good shape because we have some fixed grade loans and they are very high, so couldn't expect these companies to pay much more than that anyway. So we're in good shape there. We bought the ability to get money in, in case interest rates go up with our coverage through BB&T so hopefully that would protect us from there. The variable rate loans that we have, all have floors and that works a little bit against John in this situation because as the interest rates come up, we're already protected by the floors. So we really don't move up and that would cut into us a little bit. The floors are pretty high, so as a result interest rates will have to grow very high to kick that in.

Now if they do go with that rate, we will participate as rates grow higher, but the difficulty here is that any dead ends from then is going to have some kind of problem with it during an inflationary period. For us a good news here is that the companies that we have should be able to pass on any kind of increase in cost, and as a result the equity should become more valuable overtime and as the equity becomes more valuable, obviously than that asset value and the strength in this company will become stronger as well. So the only protection here is for our use of variable rate loans with floors and we got large equity positions that should sustain us through an inflationary period.


Our next question is coming from David West with Davenport & Company. Please state your question.

David West - Davenport & Company

Good morning. I’m just curious, it's encouraging to hear your thoughts that you maybe able to try to pursue some new investment opportunities over the next several quarters. I know you worked off the card to reduce your leverage. Could you kind of frame in dollar term, David the amount of new investments you would be comfortable making over the next quarter or two?

David Watson

I think we can invest another $15 million, $20 million. We are working with our line of credit now and assuming that we make some kind of announcement in the near-term that we renewed that hopefully for little longer than one year. That will be able to put $15 or so million and new deals. We are talking with other people that we joined the line of credit so we might have another apartments come into that line of credit and push it up. But ultimately David we really need long-term debt and can raise equity at these low price but we need long-term debt in order to make this work.

We have been looking at some variation on preferred stock at the little too expenses now but we treat that just like that. So, whether we could get long-term preferred stock or long-term debt at a lower coupon and both of those work the same for us. So we are looking at both of those and I’m hopeful we’ll strike goal with one of those and at some point in time have an announcement and then have long-term debt that we can invest in continue to grow the assets.

But I say that is until we make some kind of announcement along those lines, we are probably stock at $15 million or $20 million until we, and again this all depends on whether we sell one or two of the companies and reinvest the money and the capital gains that we get. So lot of activity going on at this point in time and all of it much to up in the air for me to give more than that as details to it.

David West - Davenport & Company

And to confirm you said your current borrowings on the line of credit are around $15 million at this point in time?

David Gladstone

That’s right. About $15 million.

David West - Davenport & Company

And lastly any comment on the potential A. Stucki to do further preferred dividends in the future.

David Watson

Well they are running at a good rate and so are all our others. They are making good money. We would hope that we’d be able to take a dividend out of some of those companies over the next year.


(Operator Instruction). Our next question is coming from John Rogers with Janney Montgomery Scott. Please state your question.

John Rogers - Janney Montgomery Scott

A quick question on the what would the cost portfolio look like the valuation on preferred stock sell for several of the companies. I was wondering, is this a trend? Is this indicative of how the valuation multiples on these companies or are fundamentals weakening?

David Watson

Now what happens in the marketplace, we value our equity based on multiples that we get from some services that tell us what the multiples are going on in the marketplace and as those multiples come down we have to mark down the equity on preferred stock in these companies. So over time even though we would not want to sell and don’t plan to sell any of these companies that those multiples, the evidence is that we have to mark them down because the multiples have come down. So our goal over time is to watch these multiples and hopefully make some sense out of them because they are coming down to a very low level.

Our problem and we have to work with this is that we bought some of this companies and brought into some of these companies that 4.5, 5.5 times EBITDA. The multiples at the time that people were paying were 8, 9 and 10 times and so as a result, as those heated multiples come down to something more normal we are having to bring our 4 and 5 multiples down to 3 and 4 times which is probably unrealistic but at the same time that’s the methodology that we have selected to use and I think all of these evaluations are just hard priced guesses as what the value of these companies are and if we sell one of these and it comes in at a higher number than the multiples, you'll know how conservative we are and as you know we have one of our companies in detailed discussions with folks about perhaps being sold and we will see what that multiple looks like.

John Rogers - Janney Montgomery Scott

Okay. So the fundamentals would you say are stable. You are saying you are seeing positive stabilization?

David Watson

That’s right. In terms of fundamentals we mean day-to-day operations of these businesses which means that they are getting sales in. They're seeing a few up ticks in sales. They are not seeing this deep decrease in sales and backlogs that they saw during 2009. They are seeing some stability in their day-to-day operations.

John Rogers - Janney Montgomery Scott

Valuation on Noble Logistics saw a little bit for the debt. Can you talk a little bit about what's going on there?

David Gladstone

We've struggled with that one from the standpoint of how to value it. It's gone through some interesting cons and some of it is deliberate as in to the automotive dealerships and we've seen a sharp decrease in some of the dealerships. Their other part of their business has been strong and continued on and I think the dealerships will come back. But at this point in time we were struggling trying to figure out what would be a decent valuation for them and just had the type of very conservative approach to it.

John Rogers - Janney Montgomery Scott

Okay, great. If the dealers don't come back, how do you look at the current cash flow? Is it sufficient to continue to service your debt?

David Gladstone

Oh, yeah. We are servicing the debt and I think the company will survive. It wouldn't survive if every single dealership went away but nobody expects that. They are into some of the stronger dealers and we expect that to continue.

John Rogers - Janney Montgomery Scott

Okay, great. And then just last question. It was a small item but your senior subordinated term debt for ASH actually improved, the valuation improved versus last quarter? I know you're in talks with the senior lender there. Could you talk a little bit about how that's progressing and where do you think that that might shake out?

David Watson

My guess is that they will continue to be what they are today and apparently strong and continue to make the payments that they're making. My guess is that over the next year, the company will get stronger simply because at some point in time these school districts have to buy buses and they will get shipment for buses. They are up this year versus the prior year. I don't know what they will be for 2010. My guess is they will be up again because these buses wear out and you've got find new buses and at some point in time you will have to get the money from some place in order to continue to maintain their bus wraps. So from my perspective and this again is just a guess, I think the company will be better in 2010 than it was in 2009 and certainly better than 2008.

Dave Dullum

And John, This is Dave Dullum They've gone through a major, for the right reasons expense reductions which really kicked in if you will on a full run-rate near the end of last year. So what we're going to have is a benefit of that in 2010. So essentially the EBITDA run rate is frankly significantly better than where it was near the end of last year. So, as David said I think we are seeing definitely more stability here and continue to work that to try to get back on a current day basis.

John Rogers - Janney Montgomery Scott

Okay, great. Obviously municipalities are hurting too. Do they benefit from similar dollars? I have no idea but it's….

David Gladstone

Not really. Unfortunately where they are, in the school districts there are in, in Nevada, we haven’t seen and maybe some green by the way. We're seeing some interesting things going on there and that’s actually had a little bit of a assist with some of there pier products and some of the capability they have.


It appears we have no further questions at this time.

David Gladstone

All right. Well we appreciate all of you calling in and then if you have questions, you can always e-mail them in. We'll try to answer them as long as they are not major questions and if you send in something that we think we have missed, we will put it on our Q&A section and you should check in and take a look at that from time to time. With that, that ends this and operator if you’ll come in and close it up, that will be great.


Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!