Gladstone Investment Corporation F4Q10 (Qtr End 3/31/2010) Earnings Call Transcript

| About: Gladstone Investment (GAIN)

Gladstone Investment Corporation (NASDAQ:GAIN)

Year End 2010 Earnings Call

May 25, 2010 8:30 a.m. EST


David Gladstone - Chairman & CEO

David Dullum - President

David Watson - CFO


Vernon Plack - BB&T Capital Markets

David West - Davenport & Company

[Jeff Redner] - UBF

Ross Demmerle - Hilliard Lyons


Greetings, and welcome to the Gladstone Investment's year-end 2010 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow a formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. David Gladstone, Chief Executive Officer for Gladstone Investment. Thank you. Sir, you may begin.

David Gladstone

Thank you, [Diego]. I appreciate the introduction; and hello and good morning to all of you out there. This is David Gladstone, Chairman, and this is the quarterly conference call for shareholders and analysts of Gladstone Investment, trading symbol GAIN.

Again, thank you all for calling in. We are very happy to talk to shareholders. We wish there was more opportunity to do it. If you're ever in this area, the Washington DC area, we're in McLean, Virginia just outside of Washington DC, so please stop by and say hello. You'll see a great team working for you. I think they're the best in the business.

Now let me read that statement I always read at the beginning. 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. Even though they are based on our current plans, we believe those plans to be reasonable.

There are many factors that may cause the 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 as filed with the Securities and Exchange Commission. Those can be found on our website at and the SEC website as well.

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.

You're going to hear from the three Davids today, David Gladstone, David Dullum and David Watson and we'll start out with our President, David Dullum. He'll cover a lot of ground; and, Dave, take it away.

David Dullum

Thank you, David. Good morning, all. To briefly review, GAIN is an investor in buyer transactions of lower middle market businesses. WE partner with management teams and private equity sponsors in these transactions to achieve the necessary leverage and the best financial solution for the transaction at the time.

Our products are mezzanine or junior debt instruments combined with warrants to buy common stock or and equity investment in common stock or preferred stock. This approach provides the investing discipline to be focused on generating income for dividend distributions on a current basis and future capital gains to enhance the overall returns to our shareholders.

We may also find from time to time opportunities to provide capital in support of business owners and management teams who are not seeking to sell their company outright but achieve partial liquidity through a recapitalization of their business or where they have a capital need to strengthen the balance sheet as in for growth.

I believe right now we are in a very favorable environment for our type of financing what with the availability of asset-based and bank senior term loans being a challenge for private equity sponsors in leverage transactions to date. Therefore, these structural circumstances extend the need for the junior debt/mezzanine tranche that we provide.

Moving briefly to the activity over the last quarter and year, we invested $0.9 million in A. Stucki for an add-on acquisition and $1.5 million ASH Holdings to help finance out a senior lender. Both of these are existing portfolio companies.

There were no exits from our buyout portfolio though we continued to analyze opportunities for recapitalizing or exiting from select portfolio companies at the appropriate time. In this regard, we previously reported that one of our control buyout portfolio companies had signed an agreement with an investment banking group to review strategic options.

This process is moving forward and we hope that it continues on a positive note. There is no certainty, though, in the outcome at this time.

During the quarter we received $679,000 of principal repayments from companies in our portfolio and dispersed $2.4 million to these companies. During the quarter we extended the Noble Logistics revolving credit facility to May of 2010 which was previously due to expire in February of 2010.

We continue in our efforts to refinance lower yielding debt obligations and to pay down our line of credit and reduce our interest costs, thereby strengthening our earnings per share.

During the quarter ended March 31, we received scheduled principal repayments of about $27,000 from our remaining syndicated loans and, subsequent to the fiscal year end, we were repaid in full from Interstate FiberNet and received $6.8 million, which is both our fair value and was the cost basis of this investment as of March 31, 2010.

As a result of these various activities, at the end of the March quarter, which is our fiscal year end, we had $215.4 million invested in 13 buyouts at cost and $12.2 million invested in two syndicated and one non-syndicated loan for a total portfolio cost of about $227.6 million and total assets of around $297 million.

For an update on the [performing] of company, in general, the companies are performing well in this current environment and we are starting to see some improvement. We continue to emphasize the portfolio management activity, which is one of our strengths and a very important part of our investment management approach of working to limit losses and reserve cash flow from those portfolios.

This portfolio management team of our advisors at Gladstone Management continues to provide value-added services such as the following; first, strategic and business planning. This is where we work with outside resources to assist the companies in continuing to review their competitive positioning and talent resources among other key business metrics.

Secondly, operating management support; this is where we top experienced operating management talent, some on staff, others from a pool of talent which we have cultivated over the years.

Third, facilitating interaction between portfolio company management teams, which allows for an exchange of ideas such as best practices in purchasing, pricing and manufacturing discipline.

An important point here is that this is an experienced operating resource and works with the portfolio company management and the equity sponsors to improve the company's operations and growth potential. This is extremely important in these challenging times and adds value to our portfolio.

As for the marketplace where we operate, which is smaller companies and the buyouts; as I've been saying for the past few quarters, this market continues to be challenged in two areas, the economy first and secondly the availability of senior financing.

While the economic conditions continue to create uncertainty around earnings and cash flow of the lower middle market companies, we are starting to see some stability and greater visibility in earnings such that there is now increasing south side and M&A activity.

Secondly, the senior debt availability continues to be primarily asset based with limited appetite for cash flow loans, though we are starting to see leverage ratios hedge up at around 2.5 to three times EBITDA.

The result of this is, first, valuations relative to trailing EBITDA are around six to seven times for good companies and we believe may begin to move up; secondly, private equity firms will continue to provide around 50% of the equity in the capital structure.

Third, as a result, the mezzanine equity co-investment will be in demand to fill the gap between the senior lenders and the equity investors, which is the product and, of course, our profile.

Regarding pipeline for new deals, the factors that I've previously mentioned are to our advantage as the valuations we see are reasonable, overall leverage is attractive and there's greater demand for junior or mezzanine debt, again, to our advantage.

Having successfully navigated the many challenges of the past year, we are now able to turn our attention to increased marketing and deal-generating activity. As a result, we are experiencing and increase in the flow of both the quality and the number of new opportunities for mezzanine loans and equity co-investment.

We continue to be cautious about the economy and we'll be diligent in our pursuit of new investment. However, we are in a very good position with capacity for new investments resulting from the funding availability from our recently renewed two-year line of credit.

Our increased marketing efforts and presence in the marketplace should be favorable to making a few new investments over the next year. Therefore, the outlook and our goal for this fund is to maximize our distributions to shareholders while achieving solid growth in the portfolio for proprietary investments in this lower middle market buyout.

Dave, this concludes my part of the presentation.

David Gladstone

All right, that was a great report. We're excited about the future for this fund. Now let's turn it over to our CFO [inaudible]

David Watson

Thank you, David, and good morning, everyone. Before I dive into the balance sheet and income statement I'd like to highlight several key points for the quarter-end. First, we believe our portfolio is performing well. This is reflected in the increase in the valuation during the quarter of $17.8 million. It is also reflected in that all of our companies are current with interest and principal payments.

Second, we were able to renew our line of credit for two years. At the time of this call, we only have $11.1 million outstanding and we have the ability and the flexibility to deploy more capital for the right opportunity.

Third, as we have done for the last three quarters, we purchased $85 million in short-term US treasury security through the use of borrowed funds at quarter-end to satisfy our asset [purchase] requirements.

Fourth, net investment income remained stable and for the fiscal year it covered 100% of all of our dividends to stockholders. Lastly, we declared a $0.04 monthly dividend for April, May and June and in the fourth quarter continued to pay dividends to our stockholders.

Now for the details and I'll start with the balance sheet. At the end of the March quarter, we had $297 million in assets consisting of $207 million in investments at fair value and $90 million in cash and other assets. Included in the cash and cash equivalents was $85 million of US treasury securities, which I have previously mentioned.

Therefore, at the March quarter-end, we had $27.8 million borrowed on the line of credit, $75 million borrowed via the short-term loan and had $193 million in net asset, so we were less than one to one leverage on our senior [feature] requirements.

We had a net asset value of $8.74 per share. Currently, we have $196 million in investments at fair value and cash of $6.9 million. We believe this to be a safe balance sheet for a company like ours and we believe our overall risk profile is low.

In regards to our income statement, for the March quarter-end, total investment income was $4.7 million versus $6 million in the prior year quarter, while total expenses, including credit, were $2 million versus $3 million in the prior year quarter leaving net investment income, which is before appreciation, depreciation, gains or losses, of $2.7 million versus $3 million for the quarter last year, a decrease of 9%.

For the fiscal year ended March 31st, total investment income was $20.8 million versus $25.8 million in the prior year while total expenses, including credit, were $10.2 million versus $12.4 million in the prior year, leaving net investment income of $10.6 million versus $13.4 million for the prior year, a decrease of about 21%.

[Driver] of the current income versus the prior year's income. Growth for the [quarter] and 12-month period ended March 31st was due to the loss of income related to our previously held senior imitated loan, the majority of which were sold during the June 2009 quarter to repay our old credit facility to Deutsche Bank.

We did have a lower interest expense offset from the loss in income from the loans we sold but not that much because the rate of interest on our new line of credit was much higher.

Let's turn to realized and unrealized gains and losses. Realized gains and losses come from actual sales or disposals of investments. Unrealized gains and losses, also known as unrealized appreciation and depreciation, come from our requirement to mark our investments to fair value on our balance sheet with the change in fair value from one period to the next being recognized in our income statement.

Unrealized appreciation and depreciation is a non-cash event. For the March 2010 quarter-end there were no realized gains or losses. For the March year-end we recorded $36 million in realized losses of which $34.6 million related to the afore mentioned [forced] sale of our senior indicated loan in April of 2009.

For the March 2010 quarter-end, we had net unrealized appreciation of $17.8 million over our entire portfolio. This was driven by $15.9 million of unrealized appreciation from our investment in A. Stucki.

Remaining net appreciation was primarily due to increased performance at our portfolio company. For the March year-end, we had net unrealized appreciation of $14.3 million, which reflects the reversal of $35.7 million in unrealized depreciation resulting from our realized losses.

Excluding reversals, we had $21.4 million in unrealized depreciation for the March 2010 year-end, which is reflected in our current portfolio. The unrealized depreciation was primarily driven by lower multiples in our control investments.

As multiples come down from the prices paid for companies we have to use the lower multiples to value our portfolio. Although our aggregate investment portfolio has depreciated, our entire portfolio was fair valued at 91% of cost as of March 31, 2010.

The unrealized depreciation of our investment does not have an impact on our current ability to pay distribution to stockholders but does indicate that the value is lower and there may be future realized losses that could ultimately refuse our distribution.

Now let's turn to net increase or decrease and net assets from operation. This term is a combination of net investment income, unrealized net appreciation or depreciation and realized gains or losses. Please note that we are talking about weighted average, fully diluted common shares when we use per-share numbers.

For the March 2010 quarter-end, this number was an increase of $20.6 million or $0.93 per share or a decrease of $4 million or $0.18 per share in the prior year's March quarter. The year-over-year change is primarily due to the large unrealized appreciation recorded in the current quarter.

For the March 2010 year-end, the net decrease in net assets from operations was a decrease of $11.1 million or $0.50 per share versus a decrease of $11.4 million or $0.53 per share in the prior year. A loss of income in the current year related to the number of syndicated investments held last year was offset by smaller net unrealized depreciation recorded in the current year from our investment portfolio.

While we believe our overall investment portfolio is stable, it continues to meet expectations. With the continued investor uncertainty in the current economy and credit markets, investors should expect continued volatility in the aggregate value of the portfolio.

Our average loan rating for the quarter remains unchanged. The risk rating for [symbol use] that our originated loans had a weighted average of 5.5 for this quarter, which is unchanged from the December 31st quarter.

The risk rating for unrated, syndicated loans was a weighted average of nine for this quarter, an increase from a weighted average of six from the December 31st quarter. Our risk rating for this [quarter] gives investors the probability default rating for the portfolio with a scale of zero to 10 with zero representing a high probability of default. We see the risk in this portion of the portfolio is gain relative to [inaudible] as [product orders].

As for the few loans we have that are rated syndicated loans, they had a weighted average rating of BB2 in the quarter ended March 31st, unchanged from last quarter-end.

Historically, we had concentrations of variable rate loans in the syndicated market and we have sold or exited all but one syndicated loan. Some of our buyout loans have variable rates but we almost always have a minimum or floor in the rate charged so that if interest rates decline we will minimize the impact on our ability to make distribution.

We purchased an interest rate cap on $45 million of the debt on our new credit facility in order to have some protection on our cost of funds if interest rates rise. We have about $152 million at cost in fixed rate loans or rates with a fixed floor all in our buyout deals. In other words, 83% of our debt measurement at fair value have a floor or a fixed. They are also at a relatively high rate.

As of the March 31, 2010, we do not have any loans with paid-in-time income or original issue [inaudible]. Fixed income would result in recording non-cash income from which we would have to distribute out to our stockholders under tax rules. In essence, we would have to borrow money to make a distribution to our stockholders because we did not receive any cash from our fixed income. We avoid being in an unsustainable situation that could result from fixed income.

Currently, all of our portfolio companies are paying. However, our investment in ASH remains on non-accrual as of March 31, 2010.

To summarize the past fiscal year, we started it off in a tough situation with our borrowings. We were forced to sell our senior syndicated loans to satisfy our obligations on our previous line of credit to Deutsche Bank which resulted i9n $34.6 million in realized losses.

We now have a two-year $50 million line of credit in place and currently have $11.1 million outstanding, which we believe is extremely low leverage. Our investments are all current and, despite tough market multiples, have recovered some of their value over the past quarter with $17.8 million in net unrealized appreciation and they now sit at 91% of their cost basis as of March 31, 2010.

From an income statement standpoint, we were forced to cut and right-size our dividends in the beginning of the year due to our decreased revenue from the senior syndicated loan sale. Now that we sit here at the end of the year, we believe our revenue has stabilized as is reflected in the fact that 100% of our dividends this fiscal year came from net investment income.

With that, we look forward to maintaining momentum in fiscal year 2011 and I now will turn the call back over to David.

David Gladstone

All right, thank you very much for that detailed report. I hope each of our listeners out there will read the press release that came out and also obtain a copy of our annual report called the 10-K, which has been filed with the Securities and Exchange Commission. You can access that on our website at and also on the SEC website and we'll be mailing out the annual reports in near term so that you get a hard copy if you're a shareholder.

As mentioned, I think the big news this time was the recovery from the difficulty caused by Deutsche Bank. They didn't continue our line of credit. In order to pay them off we had to sell a lot of our performing loans and that caused us to have less income, reduce our dividend and on and on it went.

Because of this, loans are down so far and we've had to sell the performing syndicated loans at steep discounts. This causes us to start from a new base and it was very disturbing to all of us to have to go through that but we are very happy that BB&T and Key Banc both came forward and loaned us some money to help pay off Deutsche Bank.

So the sale of our syndicated loans and the money from BB&T and Key Banc helped us pay off that. We have a great relationship with folks that are lending us money now and they've stepped up and given us this two-year line of credit that we have.

So all of that is behind us. We look back and this closing out this year. We look behind us one more time as we talk to you but really all of us are looking toward the future now and we're trying to figure out ways to grow our asset base in a very conservative way as we have in the past.

We are looking for some long-term debt, so we're currently working with some insurance companies and others and hopefully we can find some long-term credit there. We're getting to know that long-term credit market very well and expect to have some success in that in this calendar year, 2010.

So stay tuned and, oh, by the way, I should mention that we don't have any investments in Greece and we have none in Europe or Asia and we have very little exposure to those through our portfolio companies. Our companies are all US companies, so if you're worried about Asia or Europe, we are a good place to put your money.

We do have some worries though -- continuing to worry about the cost of oil because we believe it's going to go up again now that the economy has at least stabilized and going back up. The US is far too dependent on foreign oil. We have so much domestic energy sources here and coal and natural gas and nuclear. It's a shame that we're so dependent. We should be investing in those categories and becoming less dependent on foreign oil.

The trade deficit with China continues to hurt. China subsidizes all of its businesses by selling them cheap oil and gas for their operations as well as other subsidies and then they turn around and under the Free Trade Agreement sell us the product. So, in essence, China has destroyed thousands of businesses in the United States and caused the loss of many jobs. It's just difficult to watch these jobs disappear and go to China and to other nations and Asia.

As you know, China is probably still not buying much of our debt anyway, so not good friends there these days. My own personal view of China is that they're going to have some really big problems over the next 18 months and the reason I think that's happening is that they're building office buildings and other buildings in China that no one's occupying.

Their banks keep lending money to build these. At some point in time they have to shut down a lot of the construction that's going on and that's been a big support for their economy.

We are now worried about inflation. This comes from all the printing of so many T bills. Obviously we will never pay those T bills back, so it's like issuing dollars and we're worried that the dollar is going to have some kind of big depreciation over the next 18 months from the fact that so much money is being printed.

I've said it several times on here that I think inflation is coming because of the devaluation of the dollar and I think that's going to hurt a lot of people, especially those that are on fixed income.

The amount of money being spent on the war in Iraq and Afghanistan is very detrimental to our economy today. Don’t get me wrong. We think the soldiers that are doing the fighting are the most wonderful people on the earth. They risk their lives for us every day and they're our true heroes in this part of our history. However, the war is continuing to drain our economy. I hope it ends soon.

Even worse, of course, is the pork barrel spending by the federal government. They're acting so irresponsible today. The government is spending trillions and trillions of dollars on projects that are supposed to stimulate the economy and they're really not creating any jobs. They're just holding out some older businesses that are out there that are going through some big changes.

The good news is state and local governments are in shock today about the tax income that they're getting. It's way down and there's got to be at least 35 or 40 states now that are having severe budgetary problems and are not spending more money. They're actually spending less. That's probably some good news for all of us.

Of all the money being spent, very little of that money is aimed at small businesses. The current administration keeps promising and the congress keeps promising that they're going to put together a program for small businesses and they just haven't done it.

Small businesses create about 80% of the new jobs and new spending is really missing the opportunity to stimulate these small business. Congress continues to promise and we'll just have to see if they ever get around to doing it.

The current stimulus bill that they've passed hasn’t created any long-term employment. It's just been propping up worn out businesses that we already have.

In other ways, the US economy continues to remain viable. It's not vibrant but it is continuing to push along. As long as businesses were not related to housings or autos or the financial institutions, those businesses have avoided the traumas that have endured in those industries.

But all the industries have suffered due to the bad acts of a few and many of the entrepreneurs today, the small business owners and the other side of managers have kept their costs low but they're suffering decline in sales.

We all know there's a terrible slowdown and we all see it in our companies and our portfolio companies and our portfolios but we also see tremendous strength in those companies as they continue to make their payments and make profits.

Backlogs are still down and so are sales in most companies from where they were two years ago. It's going to take a little more time to get through this part of the recession but we're very lucky here at this company. Our portfolio of companies are still doing okay. It's a testament to their tenacity.

These managers are really good managers and good entrepreneurs and I can tell you a good entrepreneur is worth 100 bureaucrats when it comes to running a business.

Employment is worse that we had ever forecast. While the government's reporting that the percentage of out of work people is in the, I don't know, 9%, 9.9%, wherever they're at today. They say it's going down.

The government's really not counting all the people that are out there. Many of them have given up trying to find a job and they're certainly not counting all the part-term workers that would like to be full-time. The figure for unemployment is probably somewhere between 15% and 20% today, which is way above anything we expected to happen.

I do believe that we're near the bottom of the recession, that we're maybe a small correction that's going on now. Six months from now we'll probably look back and say that the summer of 2010 was when we bottomed out completely and on the mend now.

I think this company is going to do extremely well in the future. As you know, some of the folks that work here are buying stock in the company, so that's a good signal.

As mentioned before, our distribution declared by Board in April is $0.04 a month for April, May and June with a run rate of $0.48 a year. The Board meets again in July to consider July, August and September.

Our banks are requiring us not to pay out more than our earnings in order to preserve capital and now we have to get busy, of course, and build the income back up and get our monthly distributions back up.

A distribution rate with a stock price of $5.24 as we closed yesterday is about a 9.1%, 9.2% yield, so that's extremely high for a company that's in such good shape as we are today. We have no plans to reduce the distributions and dividends to shareholders and this means buyers of the stock today are getting a fabulous return as they wait for us to continue to build the business back up.

I would mention, please, that you go to the website and sign up for our email notification service. We don't send out junk mail, just news on your company. Go to and sign up for those email notifications so that you can keep up with your company.

Just to summarize, as far as we can see, the rest of calendar 2010 looks much better than 2009. That's not hard to do but at least 2010 looks much better in the outlook. As you know, we can only see a couple of quarters out, so we'll be careful. We are stewards of your money and the worst is behind us.

We're now looking to have base continue its strength and continue to build from here. We're looking for new investments. Look for us to have a couple hopefully this summer, good investments that would put on the books.

At this point in time I'll stop and have [Diego] come back on and ask the analysts and the shareholders out there for any questions they might have for us.

Question-and-Answer Session


Thank you, Mr. Gladstone. We will now conduct the question-and-answer session. (Operator Instructions) Your first question comes from the line of Vernon Plack - BB&T Capital Markets.

Vernon Plack - BB&T Capital Markets

David, I was hoping to get a little more color on the write-up in Stucki this past quarter. It was a pretty meaningful write-up.

David Gladstone

Yes, that one is -- you probably identified the company that has been working on a sale but we really can't comment further than that.

Vernon Plack - BB&T Capital Markets

In terms of, I believe -- I thought it was mentioned that all your companies are current from an interest and principal standpoint. I believe you have one loan still on accrual. Is that ASH or is that not the case?

David Gladstone

Well, we put one loan on non-accrual but they're paying and we just didn't want to say that it's current and then to have it slunk. It's doing very well and the management team there has done a great job in making the company come back from a pretty dismal situation. As you know, that's our bus company out in Phoenix and Los Vegas and they're now seeing an uptick in sales of busses and that should mean continued growth and strength there.

But we just haven't taken it off non-accrual. It was on non-accrual for a good long time and then they worked out a plan of making payments and they're now making payments. So it's on non-accrual but it's current.


The next question comes from the line of David West - Davenport & Company.

David West - Davenport & Company

Assuming the sale does go through of your control company, would that -- I guess a two-part question -- does that, in and of itself, relieve you of the diversification test assuming redeployment of the money? Then what possible short-term impact might that sale have on net investment income?

David Gladstone

Well, it's just too hard to speculate now. Obviously if we got a huge amount of money it would help the diversification by putting it back out. Cash is counted toward the diversification, so we'll be okay there.

I don't think it wold -- we haven't done the numbers in detail but I don't think it would eliminate it. It would just reduce the need for us to borrow some money under the terms that we do it now pretty dramatically.

It would also, obviously, pay off our bank loan completely if we got that much money back. So we're just looking at things now trying to figure out when and where if that goes forward. It's been a good discussion with people who are interested in it. It's just too early really, David, to make any comments about it.


Mr. Gladstone, there are no further questions at this time.

David Gladstone

All right, you've got one last chance to punch the button and ask your question. We're at the end of the show.


(Operator Instructions) Your next question comes from the line of [Jeff Redner] - UBF.

[Jeff Redner] - UBF

I actually have a two-part question. NAV was $8.74 a share. We're paying dividends at the rate of $0.48 a year, which works out to be about 5.5%. What do you think, first of all, would be a fair rate of return on $8.74 in essence? That only works out, as I said, 5.5%. Might something like 7%, 8% or 9% return be a fair estimation? Secondly, when do you anticipate getting a higher return on the assets?

David Gladstone

Obviously in the past we've had some assets that were at a low yield. If you remember, this company is different from Gladstone Capital Lending. We have a significant amount of investment in equity. Obviously equity doesn't have a current return. We'll see as time goes on whether equity has a good strong capital gain behind it and maybe we'll test something this quarter if the stars align.

But the point being that it's very hard to get NAV, which is driven by the appreciation of the equity to have a high return on it as we do in Gladstone Capital. So Gladstone Investment for the most part is not going to have as high a current return in today's marketplace as you'd see in some of the other companies out there simply because it has such a large component of its assets in the equity side.

I'm not sure that'll change over time. We are hopeful that as we go forward now that the marketplace has come back a little more reasonable that we'll be able to put a lot more in mezzanine debt. So as the mezzanine debt continues to go forward, this marketplace is -- it looks like the mezzanine debt marketplace is going to be good for us, which means on a current basis we'll have much more income.

But I'm not sure what the number should be. You're calculating 5.5% on something that has a large component of equity in it, market appreciation. So I wish I could help you build your model but I can't make much more comment on that.

[Jeff Redner] - UBF

What about the investment to the money we have in treasury bills, which obviously is running a very low rate of return?

David Gladstone

No, remember, that was a one-time event. What happened at the end of the quarter is we buy a lot of treasuries and then we sell them. So they go away almost immediately. Within a week of that we buy and sell. So those aren't on our balance sheet for very long and it's just to make the diversification test that, I think, David Watson was referring to.


Your next question comes from the line of Ross Demmerle - Hilliard Lyons.

Ross Demmerle - Hilliard Lyons

I was wondering if the recent jump in LIBOR is going to have any kind of meaningful impact on your interest expense or on interest income here going forward?

David Gladstone

Well, we have a 2% LIBOR floor and we haven't broken through that yet. But if they keep screwing up in Europe we might break through it this year. We've obviously broken through it in the past.

As far as our portfolio companies, we have, as mentioned by David Watson before, we have floors and I don't think that we're anywhere close to breaking through those floors. Many of them are very high and so as a result, probably not going to do much for us in the near term. What's the percentage, David Watson, that we have in variable rates with no floor?

David Watson

So 83% of our investments have either a floor or a minimal amount. So we're looking at 17% that would be impacted by an increase.

David Gladstone

But is that 17% in debt or is that in equity?

David Watson

In debt.

David Gladstone

So 17% of the portfolio would be impacted by the increase in LIBOR, not a big change. LIBOR hasn't changed that much, although if you're looking out it's hard to know where LIBOR's going other than up at this point in time.


There are no further questions at this time, Mr. Gladstone.

David Gladstone

All right, last chance to ask the question. All right, [Diego], that's the end of this presentation. We appreciate you all for calling in.


Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your line at this time. Thank you all for your participation.

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