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Gladstone Capital (NASDAQ:GLAD)

F1Q 2014 (Qtr End 12/31/2013) Earnings Call

February 4, 2014, 8:30 AM ET

Executives

David Gladstone - Chairman, Chief Executive Officer and Interim President

Robert Marcotte - President

Melissa Morrison - Chief Financial Officer

Analysts

Troy Ward - KBW

J.T. Rogers - Janney Capital Markets

Operator

Good morning, and welcome to the Gladstone Capital Corporation's first quarter ended December 31, 2013, shareholders conference call. (Operator Instructions) Now, I would like to turn the conference over to David Gladstone. Mr. Gladstone, please go ahead.

David Gladstone

Well, good morning and thank you, Keith, and good morning to all of you. This is David Gladstone, Chairman. This is the quarterly earnings conference call for the shareholders and analysts of Gladstone Capital. Common stock traded at GLAD and the preferred stock is traded at GLAD with a P at the end, for preferred.

Again, thank you all for calling in. We're always happy to talk to our loyal shareholders and potential shareholders. I'd like to give an update on our company and our portfolio and our business environment. I wish we could do this more often, but time just doesn't permit.

An invitation is extended always. You have an open invitation to come visit us in our office in McLean, Virginia. We're just outside of Washington D.C. Please stop by and say hello. I think you'll see some of the finest people in the business.

Please take the opportunity to visit our website, www.gladstonecapital.com, and sign up for our e-mail notification service. We don't send out any junk mail, just timely news about the company. You can also find us on Facebook under the keyword, The Gladstone Companies, and you can follow us on Twitter at Gladstone Comps.

Now, let me read the 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 Securities Exchange Act of 1934, including statements with regard to the future performance of the company. These forward-looking statements inherently involve certain risks and uncertainties and other factors even though they are based on our current plans and we believe those plans to be reasonable. Many of these forward-looking statements can be identified by the use of the words such as anticipates, believes, expects, intends, will, should, may and similar expressions. There are many factors that may cause our actual results to be materially different from any future results that are expressed and implied by these forward-looking statements, including those factors listed under the caption, Risk Factors, in our 10-K filing and our registration statements that's filed with the Securities and Exchange Commission, all of which can be found on our website at www.gladstonecapital.com and also on 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, after the date of this conference call, except as required by law. Please also note that past performance or market information is not guarantee of future results.

Now, let's get going. As many of you know Gladstone Capital's business is to provide loans to small and medium sized private businesses in the United States. We target companies that have $20 million to $100 million in revenues and $3 million to $5 million in earnings before interest, taxes and depreciation.

Providing capital to these companies allows them to grow and it also allows them to make acquisitions of other companies or to payoff debt that's coming due. We invest in private companies with profitable operations and good management teams. We're not doing turnarounds. We invest using senior debt, junior subordinated debt and sometimes we buy small amount of the stock of the business.

During our fiscal first quarter ending December 31, 2013, we invested a combined $44.1 million in eight new investments. We also invested a combined $800,000 in existing portfolio companies mostly through revolver draws and some follow-on investments. During the quarter we received a total of $21.5 million from two portfolio companies that paid off early at par and we received a combined $3.2 million from existing portfolio companies in scheduled and unscheduled principal payment.

Unfortunately, after years of trying to fix the company, we call, LocalTel, that's in the Yellow Page business, we sold it at a loss of $10.8 million. We felt this was the best alternative for the company, after we had invested a lot of money and a lot of energy to try to turn it around over the years.

To stay the course in that business would take millions more invested and the likely outcome was certainly not certain at all. So we took our licks and sold that at $10.8 million loss.

Overall, the portfolio increased by five portfolio companies. This included four syndicated investments and three of the new investments that we co-invested with one of our affiliate funds, Gladstone Investment.

Here's a short list. We invested $7 million in debt and equity financing in Alloy Die Casting. This is a company that manufactures high-quality finished aluminum and zinc metal components for a diverse range of end-markets.

We also invested $5.5 million of debt and equity financing in Behrens Manufacturing. Behrens is a manufacturer and top supplier of high quality, really classic-looking utility products and containers.

We also invested $17 million of debt financing in J. America, a leading supplier of licensed logo apparel and headwear, mostly to colleges, but some to resorts, military markets, and they also do some wholesale distributions as well and some apparel decorations.

We invested $5.6 million in debt and equity financing in Meridian Rack & Pinion, a provider of aftermarket and OEM replacement automobile parts. They sell these mostly through the wholesale channel, but they also sell a lot online. You may want to go buy and see what they look like, its www.BuyAutoParts.com, a very interesting company.

So as you can see, we're moving forward at a good pace. After the quarter end, December 31, 2013, we invested $500,000 in a follow-on investment through existing portfolio companies. And after the quarter end we received a total of $8 million in scheduled and unscheduled principal payments from existing portfolio company. Most of that repayment came from early payoff of a company called Pop Radio, $7.8 million, and we received $100,000 in prepayment fees on that situation.

On whole I'd say, the portfolio valuation was up in the quarter. As of December 31, 2013, we have a cumulative unrealized depreciation of $58.5 million, that's bound by $16.9 million from the last quarter and we recorded a net unrealized appreciation of the portfolio totaling $6.7 million.

Now, we have one remaining portfolio company called Sunshine on non-accrual, as of December 31, 2013, with a debt cost basis of about $29.2 million. It's a large investment for us. It's about 9.2% of the cost basis of all the debt investments in the portfolio. The loan is valued at $7.3 million or about 2.8% of the fair value of all the debt investments in the portfolio.

We remain diligent and focused on managing this non-accrual investment to bring it back to profitability, and we feel we've seen tremendous improvements over the prior year, but still have ways to go to get it back to the point where it can pay interest on its debt. We have not put any investments on non-accrual since January 2012 and no investment originated in the last six years of the funds history of going on non-accrual. We just have to work off those before that period of time.

Recently, our team has been a success in turnaround on number of the non-accruals and we reported those in our last meeting. However, just want you all to know, this does not mean that we will be able to do this in the future or that loans cannot go on non-accrual in the future. As you all know, it's always possible that we may have additional loans in the non-accrual category.

Speaking about the quality of income, portfolio income quality has consistently been good when looking at new deal structures with general limiting the amount of non-cash sources of income. And so we are not very comparable with other BDCs, because specifically, we stay away from paid-in kind income and original issue discounts, those were non-cash income items. These have represented less than 1% of our total investment income over the last several years.

We have had significant amount of other income over the last several years, which primarily due to what we call, success fee. And success fees are typically due to us at the change of control of the company. We received success fees total of $1.7 million during the fiscal year ending September 30, 2013, and for the December 2013 quarter end we received about $200,000, all related to portfolio companies that had early payoff of their loan.

As of December 31, 2013, approximately 46.9% of the interest-bearing debt investment had success fees related to them. The weighted average or contractual pool of interest rate of these success fees is about 2.3% per annum, added to the accruing principal balance.

At quarter end, we had an off balance sheet contractual success fee receivable of approximately $15.3 million and this is about $0.73 per common share, and that would be owed to us if they repaid. And due to the contingent nature of this, there is no guarantee that we'll ever be able to collect them, but in the past we have been able to collect some of these success fees.

We continue to see increasing competition pressure in the leading marketplace, the senior and senior subordinated debt. I think this has resulted in lower yields to many of the BDCs for an increasingly riskier investment. Competition is generally coming from public funds like ours and many small private funds. And in spite of this increasing competition, we have maintained our weighted average yield accruing investments of approximately 11.6% over the last several quarters.

While investment climate has been difficult, we're still filling our portfolio with solid quality deals that are providing good returns, which is why our overall yield on the funds is still strong. Significantly to this fund and new deal origination and ongoing success, we've had a new President, Bob Marcotte, who is here at the table with me now.

He was appointed by the Board in early January of this year. Bob has extensive experience investing in senior and subordinated debt, and has been part of the management team of another BDC, locally one here in town. He's very qualified to be President of our company, and we are extremely happy to have him on board.

Bob, maybe you'd take a minute to comment on what you're seeing in the current marketplace out there.

Robert Marcotte

Thank you, David. First, I'd like to reiterate what David has said about the funds. Since joining in January, I've had the privilege of working with all the team. I have been very impressed, the level of experience, personal commitment as well as the rigor of the firm's investment practices.

While January is traditionally a low point in deal flow, the level of enquiries are healthy and we are taking steps to better institutionalize our investment origination activities. We are also planning to more aggressively engage the private equity sponsor community in the coming quarters, as they represent a substantial portion of the potential investment opportunities in the lower-end of the middle market.

With respect to the marketplace and market conditions and outlook, I concur with David's earlier comments, loan demand from both commercial banks and retail loan firms continue to outstrip new loan supply and are continuing to pressure yields by much of the associated refinancing activities have occurred, the continued market pressures are resulting from elevated leverage metrics, which may exceed with the underlying cash flows, business cyclicality or growing support. These supply demand and balances are less pronounced in the low-end of the middle-market where GLAD is traditionally focused, and we are closely monitoring the associated impacts.

Moreover, Gladstone's well established reputation and investor-oriented financing approach continues to be well received by the private equity and owner operators in the low-end of the middle-market. These constituents value the dedicated market focus, level of engagement, need to understand their business, and generally welcome the opportunity to establishing long-term financial partnerships.

So despite the broader investing market pressures, we continue to be optimistic that GLAD is well-positioned to originate attractive quality deals that will generate solid asset growth and income growth over the coming quarters to enhance the bottomline for the benefit of our stockholders.

And now, I would like to turn to our Chief Financial Officer, Melissa Morrison, who will report on the funds financials. Melissa?

Melissa Morrison

Hello and good morning, everyone. I hope you've had a chance to review the Form 10-Q for the quarter ended December 31, 2013, that we filed yesterday with the SEC. Let's start by reviewing the financials of the fund for the first fiscal quarter of 2014 ended December 31, 2013.

Net investment income or NII was $4.4 million or $0.21 per share as compared to the prior quarter ended September 30, 2013, of $4.7 million or $0.22 per share. Investment income decreased by 10.2% in the three months ended December 31 as compared to the prior quarter, primarily due to an increase in other income last quarter related to $600,000 in success fees and $150,000 in prepayment fees, both received in early payoffs at par.

During the December 2013 quarter end, we earned $200,000 in success fees from Lindmark Acquisition, which paid off at par last quarter. In addition, interest income decreased by $400,000 quarter-over-quarter, as we had two early payoffs at par totaling $21.5 million of interest earned in debt investments, early in the December quarter; and the majority of our new investment, David discussed earlier, was funded late in the December quarter.

Operating expenses decreased by 14.3% during the current quarter, as compared to the prior quarter, primarily due to the waiver on incentive fees we paid to our investment adviser. There was no infinity credit needed last quarter.

The credit this quarter was needed to ensure distributions to stockholders, were covered entirely by net investment income. 100% of common and preferred stock distributions paid in over the last three years were covered by NII. This highlights our commitment to prudent growth.

Success fee accruals are not recorded in our income statement or balance sheet. We only record success fees, when receiving cash. We do not include success fees in our reported deals, as they are inconsistent and would skew our actual current cash run rate.

The low net investment income on our income statement are realized and unrealized changes in the fair value of our portfolio. Realized gains and losses come from actual sales or disposable transactions of our investment. During the quarter ended December 31, 2013, we recorded a net realized loss of $10.8 million related to our sales LocalTel, a non-accrual company and with minimal realized activity in the prior quarter.

When we mark investments to fair value on our balance sheet, the change in fair value quarter-over-quarter is recognized in our income statement, as unrealized appreciation or depreciation. This is a non-cash event and it's required by GAAP investment company rules.

For the quarter ended December 31, 2013, we recorded net unrealized appreciation of $16.9 million, which included the reversal of $10.2 million of cumulative unrealized depreciation related to the sale of LocalTel. And $6.7 million of net unrealized appreciation, which was primarily due to increased financial and operational performance in several of our portfolio companies. And to a lesser extent, an increase in indexed multiples used in certain waterfall calculations.

Our entire portfolio was fair valued at approximately 83% of cost as of December 31 as compared to approximately 77% as of September 30, 2013. The cumulative net unrealized depreciation on our investments is comprised of approximately 74% of investments made in 2007 and prior.

We believe this depreciation is primarily due to the lingering effect of the 2008 recession and its effect on the performance of certain involved portfolio companies, and also because we were invested in certain industries that were disproportionately impacted by the recession.

The bottomline on our income statement is the change in net assets resulting from operations and is a combination of NII, net unrealized appreciation or depreciation and net realized gains or losses.

For the December 31, 2013, quarter end, the net increase in net assets resulting from operations was $10.5 million or $0.50 per share versus $28.7 million or $1.37 per share in the September 30, 2013, quarter end. The quarter-over-quarter decrease is primarily driven by the large reversal of net unrealized depreciation in the prior quarter related to Lindmark, paying off at par.

Now, let's review the balance sheet of the fund. As of December 31, 2013, we had approximately $301 million in total assets at fair value consisting of $283 million in investments at fair value, and $80 million in cash and other assets.

Liabilities totaled approximately $89 million consisting of $47.7 million in borrowings at cost on our line of credit, which has a revolving period ending in January 2016; $38.5 million in term preferred stock, which has a mandatory redemption feature at the end of 2016; and $3 million in other liabilities.

In summary, for the quarter ended December 31, 2013, we had approximately $212 million in net assets as compared to $206 million in net assets as of September 30, 2013, and $193 million a year ago. This represents a NAV per common share of $10.10 as of December 31, 2013; $9.81 as of September 30, 2013; and $9.17 a year ago. Of note, 7% of the increase in NAV for last quarter ended September 30, 2013, was due to the pay down of debt at par of Lindmark, which had been on non-accrual.

At the time of this call, we have about $67 million in aggregate in unrestricted cash and availability on our $137 million credit facility. So we have capital currently available that we can deploy for the right deals, which will meet the funds investment objectives and strategies. We also use our cash and availability to fund operating expenses and to make distributions to our stockholders.

We believe our balance sheet is conservative and that our overall risk profile is low. We will consider other financing sources in the next several quarters, depending on our new deal originations and available capital.

Let's now review some statistics of our portfolio. Our primary focus in our portfolio continues to be in senior and senior subordinated debt investments, which provide income to pay and every time grow our dividends. To a lesser extent, we may invest in equity investments, which we expect will appreciate and build shareholder value.

Our targeted portfolio mix is 95% allocated to debt securities and 5% in equity security. And currently our portfolio is at 93% to 7% allocation of debt-to-equity at cost.

Our portfolio as of December 31, 2013, consisted of loans to 52 companies in 26 states and in 20 different industries. This is up in that five portfolio companies quarter-over-quarter. We have a very diversified portfolio by industry classification and by geographic region, and are not too significantly invested in any one particular portfolio company.

Our five largest investments in our portfolio at fair value, as of December 31, totaled $97 million or 34% of our total investment portfolio, which is consistent with last quarter. Our credit facility and regulations under the regulated investment company IRS rules, both contains certain concentration limits, all of which we have met and continue to meet as of December 31, 2013.

We have historically targeted to have our portfolio with 90% of debt investments at variable rate and 10% at fixed rate. This helps us manage interest rate risk. Our variable rate loans generally set to the one month LIBOR usually have a minimum rate on floor, so that the effect of declining interest rates, as we have seen over the last number of years, are mitigated. And when rates begin to increase, we should see higher income. Currently, as of December 31, our debt portfolio is at an 86% to 14% variable to fixed rate allocation, resulting from some of our newer fixed rate deals.

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 December 31, 2013. The weighted average floor on our variable rate loans was 2.5% in relation to one month's LIBOR.

These loans had a weighted average margin of 9.1%, which result in an all-in weighted average rate of 11.6% on our interest-bearing debt investments. Our proprietary loans had an average all-in rate of 11.4%, while our syndicates had an average all-in rate of 10.2%.

In summary, we had good origination activity this quarter, adding quality income producing investments, while we were able to exit a non-accrual loan. We realized we need to build a portfolio with new originations to replace their early payoff activity during this and recent quarters. This will be necessary in order to grow our NII and show our shareholder accretive results in the future.

And now, I'll turn the call back to David.

David Gladstone

All right, Melissa. That was a great report. I hope all our listeners, reading our press release that we issued yesterday and also review our 10-Q for December 2013 quarter end. You can access all of that on our website at www.gladstonecapital.com and also on the SEC website.

Just as a summary, the first fiscal quarter ending December 31, I think Gladstone Capital accomplished a number of items, had good production with $44.1 million and fortunately only $21.5 million in early payoffs. We exited the one non-accrual investment that had our team tied up and now we are focus on marketing and putting new loans on the books. We are maintaining a strong portfolio yield at about 11.6%. And significantly, subsequent to quarter end, our board appointed a new President of the fund, which we feel will have a very positive impact on the future.

Our biggest challenge, like most people in our business will continue to be, finding new investments that we believe can survive another possible recession, and a possible forthcoming strong inflation that we believe is on the way. Availability of capital is also a concern in the near future. We will utilize our credit facility and look for raising additional long-term debt and equity, as time goes on.

Of course, we have other concerns, the ever-changing political and economic environment, specifically the uncertainties around the Federal Reserve and their monitory policies and the impact on future interest rates. Fiscal crisis at the federal government level is still top of our minds, as the federal deficit is now over $17 trillion and continues to climb, as government spending is just on sustainable bottomline over all of that.

Many private companies, like those in which we invest, feel that too much regulation around such things as healthcare, financial services, the energy area or missions, it's just hindering their performance and their expansion and their job growth. Nonetheless, all of these concerns effect the investment climate in which we operate. And recent economic indicators have been a little more positive than they were last year at this time, but the economic recovery is still very sluggish.

Despite the economic issues, our fund continues to make consistent monthly dividends. We have a history of earning our dividends and have continued to make monthly distributions to our shareholders. In January, our Board of Directors declared a monthly distribution on our common stock of $0.07 per common share for each of the months, January, February and March of 2014. And the board will meet in early April to consider and vote upon the monthly distributions for April, May and June for 2014.

Through the date of this call, we've made a 124 sequential monthly cash distribution to our common shareholders. And we did several quarterly distributions before that. We have in my own estimation, a dividend paying piece of machinery.

At the current distribution rate, the common stock and with the common stock price being about $9.56 yesterday, the yield on the distribution is now very high at 8.8%. Our monthly distribution of 7.125% for the preferred stockholders translates into $1.78 on an annual basis. So this preferred stock had a closing market price yesterday of $25.51 under the ticker GLADP, which gives us a yield just under 7%.

For all of you out there, please mark your calendars, we're having our upcoming Annual Shareholders Meeting on Thursday, February 13, 2014, at 11:00 AM at the Tysons Corner, Hilton, located here in McLean, Virginia, 7920 Jones Branch Drive. I hope to see all of you out there, coming to the meeting. And please if you haven't voted your shares, call up 800-690-6903, vote your shares. You can also go online to proxyvote.com, and vote your shares there too. And we'd love to see many of you there and come to the shareholders meeting.

In summary, I think we are moving forward at a good pace in 2014, although we're still cautious about the economy and the recovery and the effects on our business. We are excited about Bob Marcotte coming on board, joining our team, and we are expecting some good movement forward over the rest of the year. As you know, our management team has a successful track record of investing in medium-sized businesses and has worked together through multiple economic downturns, and so we go forward, feeling very strong at this point in time.

We'll continue to seek investments and prospective portfolio companies that have demonstrated ability to withstand economic downturns. We believe that Gladstone Capital is attractive investment for investors, seeking continuous monthly distributions. And we will continue to stay the course and continue our disciplined approach for our focusing on conservative investments in American businesses.

And now, we'll turn the call back over to Keith, our operator, and take any questions from our shareholders. Keith?

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from Troy Ward with KBW.

Troy Ward - KBW

Can you provide any color on, obviously with you in D.C. there, I mean the BDC legislative issues, that potential for those and kind of step back? And how do you look at the potential for new laws that could affect the leverage at the BDC level?

David Gladstone

My guess is watching how the SEC weighed in on leverage that it's highly unlikely that you're going to get a leverage increase from legislation. Not impossible. But when the SEC weighed in so heavily against leverage, I think it's going to be a big uphill math battle.

I think you'll get many of the other things that are in that bill that's currently before Congress. I just have limited faith that they're going to be letting BDCs leverage more than one-to-one. That came out of the 1940 Act, in 1940s when they cleaned up the mutual fund industry, overleveraging and all kind of gimmicks that were going on. And we'll see, Mary Jo is tough to deal with over the SEC. So we'll see how she weighs in with Congress.

Troy Ward - KBW

And then can you speak a little bit kind of compare your two different buckets. Your proprietary and your syndicated loan bucket, they're really not that different as we look at. I mean there's about a 100 basis points of additional yield in your proprietary loans versus your syndicated loans. So when we usually think about a syndicated loan, it's got a much lower yield. So from a credit quality perspective, how do you view your syndicated portfolio and your proprietary portfolio?

David Gladstone

Yes, it's very difficult to do the syndicated deals these days, even the second liens, because there is so much money in the high yield marketplace, they pressed returns down to a very low level and they pretty much stripped all the conditions that would protect a lender out of many of the loans. However, as you mentioned, we've gotten great returns on our syndicated loans when they payoff, we usually purchase them at below par, and there is usually a penalty for prepayment. So we've been averaging a very strong return compared to our existing portfolio.

I don't think that's going to hold up going forward, simply because the marketplace is just so aggressive these days. And now that people are piling out of common stocks and equity marketplace and piling back into the debt marketplace, I can imagine the pressures on syndicated loans will be even greater. At this point in time, I would say that we are doing very few syndicated loans only because the terms and conditions and the yields are, I think they are really worse than they were before the last recession. And that was an extremely hot marketplace then. It's just as hot or hotter right now.

Troy Ward - KBW

So we could expect that your current available capital will be pointed at more proprietary opportunities?

Robert Marcotte

I think so. Proprietary deals, we have good luck in our relationships with a lot of the LBO funds that are buying companies and we are able to tag along and provide the subordinated debt. We also had good luck in just dealing with smaller businesses that want to borrow money, generally for growth, some times to buy another company. So those tend to be the two debt places for us right now. We look at all the syndicated loans that come out for over the last two or three months, it's been [indiscernible].

Troy Ward - KBW

And then, one final one. I think you talked about the portfolio appreciation was driven by both an increase in fundamentals and a change in the multiple kind of your assumptions in the waterfall analysis. Could you provide a little additional color on maybe what those changes in the assumptions were?

David Gladstone

The assumptions are something that we agonize over every quarter. And as you know, I've said many times, it's very hard to come up with the value that everyone can agree on. We of course use for much of our debt instruments, Standard and Poor's, they help us some of the valuations. Our board looks at what S&P draw out and we have of course the different methodology that are in the valuation world.

And so we work through those, and quite frankly they change every quarter. And it adds volatility, both up and down to our valuation procedures, but we don't know of any other way of doing it. So it's something I caution everybody about. Yes, we have a valuation today at $10.10. If we had to liquidate today, yes, we'll definitely get $10.10 a share, but it really is more of a guess than a science. As you can probably imagine, any private business trying to come up with a value, you gave it to 10 people, you'll get 10 different values.

We do pride ourselves on spending a lot of time on this and I think we are about as accurate as anybody can be. But people who are running around, trading on BDCs and others in our industry based on net asset value would be better off looking at the quality of income and the growth in income than looking at net asset value.

Melissa Morrison

And, Troy, just to tag on to that and tag on to what David said, our valuation methodologies have remained consistent quarter-over-quarter. So there have been no changes in our waterfall calculations, in our index multiples and using S&P, as David stated. So the valuation methodologies were the same and consistent.

Operator

The next question comes from J.T. Rogers with Janney Capital Markets.

J.T. Rogers - Janney Capital Markets

It looks like there is about $20 million in portfolio coming due in March. Generally these investments are marked to the pretty big discount to par. Do you have any visibility to whether these are going to be repaid, extended or moved to non-accrual?

David Gladstone

We have two smaller ones that are probably going to be repaid. I'm not sure they're strong enough to know at this point in time, whether we can give you any indication of which they are, even how much. But these are both Radio transactions, and as a result they have gone into the small business administration to get an SBA-guaranteed loan, whether they get approved that it flows all the way through, really difficult to know J.T.

We are prepared to extend the loan. We're not in a foreclosure mode on those. We might ask them to do some things that we want them to do that they wouldn't have to do, if they get an SBA-guaranteed loan. So they have an incentive to get there. So as a result, I would say that $20 million have probability of some portion of it being paid and some portion of it being extended.

J.T. Rogers - Janney Capital Markets

And then there are two other investments, I don't know, if this is included in what you were just discussing. But BAS Broadcasting and Legend Communications, those are past due, they are still accruing, but are marked to pretty big discounts to par. Just wondering if you had any additional details to what's going on there?

David Gladstone

Yes. We do have additional details. I'm sorry, I can't talk about them, because they are private companies. But both of them are in the radio business. There is another one. There is three of them that we work with that have gone through some very difficult times. They have comeback some, but it's just difficult to say how far or how long they are going to be in repaying us at this point in time. Any comments on that?

Melissa Morrison

The only comment I would add, and say, they are paying their interest and we are involved in some transactions, that probably over the next several quarters we'll see some either pay-offs or extensions as David mentioned.

David Gladstone

When we talked to other people about radio stations and valuations, it's very difficult to get them on the same page that we are on. I have probably financed, I don't know, hundreds of radio stations over the years. And they usually come back. This recession has been one in which radio stations, especially the smaller groups, have not come back as quickly, although, they have come back firm and continue to grow. It's just hard to know where that industry is going long-term at this point in time.

Nonetheless, we are hopeful that some of these radio stations that have applied to SBA for SBA-guaranteed loans will come through and gets paid. I'm pretty sure one of them will come through. I am just not willing to put my money down on which one right now.

J.T. Rogers - Janney Capital Markets

And just sort of one last follow-up question on that. In terms of discussing the radio stations coming back, is this a recovery, so that the equity investors are going to get some sort of return or are you looking for them to bounce back, so that they can repay your loan?

David Gladstone

I think this is more about repaying our loan and the equity investors continuing to work in that company and fill that out. We're not the equity investors in those companies. So what they are doing is swapping out our debt for SBA-guaranteed loan debt or some other debt from a bank. And this is a continuation and they'll continue to work it and hopefully the equity will yield them something. Many times in this case, the equity is from the owner operator and it's a lifelong desire for them to own a radio station and we have just been part of the financing in past years. So they are just moving from one vendor to another.

Operator

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 comments.

David Gladstone

Thank you, Keith. And thanks all of you for calling in and the questions that you asked. Hopefully, if you have other questions you can come through our department here and get your questions answered. But we appreciate all of you calling in. And that's the end of this call.

Operator

Thank you. Conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a nice day.

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