Gladestone's CEO Discusses F1Q12 Results - Earnings Call Transcript

| About: Gladstone Capital (GLAD)

Gladestone Capital Corporation (NASDAQ:GLAD)

F1Q12 Earnings Call

February 1, 2012, 8:30 a.m. ET


David Gladstone – Chairman and CEO

Chip Stelljes – Chief Investment Officer

David Watson – Chief Financial Officer


Greg Manson – Stifel Nicolaus & Co., Inc.

Dave West – Davenport & Co., LLC

Brian (Burn) – Private Investor

J.T. Rogers – Janney Montgomery Scott

Jeff Rudner – UBS


Good morning, and welcome to the Gladstone Capital Corporation first quarter, ended December 31, 2011 Shareholder’s Conference Call. All participants will be in listen-only mode. (Operator Instructions)

Please note, this event is being recorded. I’d now like to turn the conference over to Mr. David Gladstone, Chairman. Please go ahead, sir.

David J. Gladstone

All right. Thank you, Denise, for that nice introduction and those instructions. And hello, and good morning to all of you out there. This is David Gladstone, Chairman, and this is the quarterly conference call to shareholders and analyst for Gladstone Capital, trading symbol GLAD. Thanks for all of you for calling in, and we’re always happy to talk to shareholders about our company, and wish there were many more opportunities to do so.

We hope to take this opportunity - we hope you take the opportunity to visit our website at, where you can sign up for e-mail notices and you can receive information about the time – in a timely fashion. And please remember that if you’re in the Washington DC area, you have an open invitation to visit us here in McLean, Virginia. Please stop by and say hello.

Now I’m going to read the statement about forward-looking statements. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and Securities Exchange Act of 1934, including statements with regard to the future performance of the company. These forward-looking statements inherently involve certain risks and uncertainties, even though they are based on our current plans and we believe those plans to be reasonable.

There are many factors that may cause our actual results to be materially different from any future results that are expressed and implied in these forward-looking statements, including those factors under the caption “Risk Factors” in our 10-K and 10-Q filings, and our perspectives that’s filed with the Security Exchange Commission. Those can all be found on our website at 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.

We always start with our President, Chip Stelljes. Chip is the Chief Investment Officer of all three of the Gladstone companies, and he’ll cover a lot of ground here. Chip, go forward please.

Chip Stelljes

Good morning. This quarter the first quarter of our fiscal year, we focused on managing our existing portfolio and renewing our revolving line of credit. We closed one new proprietary investment during the quarter totally 1.6 million, which resulted from the sale of KNDQ, which was one of our non-performing borrows through Ohana Media. And we invested 9.7 million in existing portfolio companies in the form of additional invested or withdrawals of revolving facilities, including an additional 4.75 million to support the acquisition of a competitor by our portfolio company, NAP.

Also during the quarter we received three payments of approximately 10.8 million, primarily comprised of the early payoff at PAR of Northern Contours, Inc. for 6.1 million as well as normal amortization, pay down on revolvers. So in total in we had a net production increase in our portfolio of approximately .50 million for the quarter ended December 31, 2011, and we funded the net increase in production from operating income and draws at our credit facility.

Since the end of the quarter we invested $3.1 million in investments to eight existing portfolio companies and we received $2.9 million in repayments, which mainly consisted of the early payoff at PAR of our investment in Global Materials Technologies. And as part of this payoff, we received $1 million in success fees, which will be reflected in our quarter ended March 31, 2012.

At subsequent to quarter end we extended the maturity date on our $137 million revolving line of credit by nearly three years from the original maturity date of March 15, 2012 to January 18, 2015. The amendment credit facility may be expanded to a maximum of 237 million through the addition of other committed lenders to the facility.

The interest rate remained unchanged in the amendment and all in rate of 5.25%, and all of the terms of the facility were substantially unchanged. We continue to see attractive investment opportunities although there seems to be a good deal of capital in competition in the market for the most attractive deals. We’re actively searching for new solid investments and believe our portfolio production will increase in the next quarter or two, in accordance for our investment objectives.

We’re very pleased we were able to raise long-term capital to our firm preferred stock offering in November, and to extend our credit facility for a three-year term. Combined, this capital should facilitate us growing the portfolio and increasing our net investment income over the long term.

At the end of the first quarter 2012, our investment portfolio was valued at approximately $293 million, versus the cost basis of $370 million or approximately 79% of cost. This fair value to cost percentages is consistent with the last quarter, which was 79% as well.

At the end of our first quarter, we had six portfolio companies on non-accrual status. We sold the assets securing our non-performing loan to KMBQ as I mentioned to Ohana Media, helped finance Ohana with a note of 1.6 million. And while this triggered a realized loss of 1 million, this 1.1 million above where it was marked at 6.30 and it converted a non-interest bearing loan in to a smaller performing loan.

In addition, our investment in Newhall Holdings was sold during the quarter, generating net proceeds before escrow collections of $3.3 million, resulting in a realized loss of $7.4 million. And the 3.3 million recovering was at 2.6 million above where the investment was marked at 9.30. We believe these two moves were the best result we could have achieved for two troubled portfolio companies.

Of the six companies on non-accrual at quarter end, we have operating control of five of them, and we’re continuing to work to fix the problems and improve the profitability. Investments classified as non-accruing at the cost basis of 28.8 million or about 8% of the cost basis of all debt investments in our portfolio as of December 31, 2011.

From a fair value perspective, the non-accrual fair value represents 3.2 million, or about 1.1% of the fair value basis for all debt investments in the portfolio at quarter end. We continue to have a high concentration of variable of variable rate loans, so we should have higher income and rates to begin to increase. And while our rates are variable, they do have a minimum rate of 4, so the declining interest rates are mitigated.

Approximately 87% of our loans at cost have floors and 6.5% of our loans do not have floors or ceilings, and the remaining 6.3% of our loans have relatively high fixed rates.

Another menu of the quality of our assets is that our average loan rating for the quarter remains relatively unchanged. Our risk rating system attempts to measure the probability of default to the portfolio by using a zero-to-ten scale. Zero represents a high probability to default and ten represents a low probability of significance. Our risk rating system for our non-syndicated loans, which constitutes 69.5% of our investments at fair value shared a weighted average rating of 6.1 as of the quarter end, which is a slight increase from where it was at September 30, 2011.

As for our rated syndicated loans, which make up 18% of our portfolio at fair value, they had a weighted average rating of B, B2 for the quarter end, which remained unchanged from the fiscal year-end.

Our unrated syndicated loans represented 12.5% of our portfolio at fair value, and had a weighted average risk rating of 4.9, down slightly 5.0 at our fiscal year end.

The quality of our income continues to be good. As we’ve discussed before, we limit income generated from paid in time or original issue discount structures. These generate non-cash income, which has to be accrued or booked in tax, but is generally not received until much later, and sometimes not at all.

This type of non-cash income is subject to our 90% payout requirement, so we would be paying out cash we had not yet received. We had no pick income during the first fiscal quarter 2012.

As for the marketplace, the Senior and Second Lien debt marketplace for larger and middle-market companies continues to improve, albeit inconsistently. At times we believe there are attractive of investments in this stage coupled with decent liquidity.

The market for loans to companies at the low end of the middle market in which we invest most of our capital and seeing more competition, but not really from banks. Most banks continue a policy and tighten credit standards, especially for companies at the lower end of the middle market. Currently many banks are making purely asset-based loans, although we are seeing an increase in non-bank lending sources.

Competition comes from other public funds like ours, and many small private funds. In net of all these, we still few we have a good market opportunity, and the loan request pipeline is good, better than it was at the end of last quarter. We hope show you some quality investments over the next several quarters. And with that, I’ll turn the presentation back to David.

David Gladstone

All right, Chip, that was a good report. Now let’s turn to the financials, and for that we hear from David Watson, our Chief Financial Officer. David.

David Watson

Good morning, everyone. I’ll go over the financials, starting with the balance sheet. As of December 31, the closed quarter of our fiscal year, we had $308 million in total assets, consisting of $293 million in investments at fair value, and $15 million of cash and other assets.

Our borrowings totaled $56.9 million at cost on our line of credit. In addition, during the first quarter of 2012, we completed a public offering of 1.5 million shares or our 7.125% Series 2016 term preferred stock at a price of $25 per share, resulting in gross proceeds of $38.5 million. We used the net proceeds of $36.4 million from the offering, to repay a portion of the outstanding balance on our line of credit.

Due to its mandatory redemption feature, we have classified the preferred stock as a liability on our balance sheet as of December 31, 2011. Related to this offering, we incurred 2.1 million in deferred offering cost during the first quarter, which we recorded as an asset on our balance sheet and we’ll amortize over the redemption period ending December 31, 2016.

For the quarter ended December 31, 2011, we had approximately $208 million in net assets, or $9.90 per share; therefore we continue to be less, and one-to-one leveraged. This is a safe balance sheet for a finance company, which are usually leveraged at higher. We believe that our overall risk profile is low.

At the time of this call, we have $55 million available on our $137 million three-year line of credit, though we have the ability to deploy more capital for the right opportunity.

Moving over to the income statement for the December quarter, net [inaudible] income was approximately 4.4 million versus 4.6 million for the same quarter last year, a decrease of 4.7%.

The decrease was primarily due to an increase in interest and dividends due to increased borrowings under our credit facility, in payment of the first monthly dividend on the term preferred stock during the current quarter.

The term preferred stock diluted our dividend paying ability for the quarter, but as we put the proceeds we netted from the offering to work into new investments, we believe the term preferred stocked will be accretive to our bottom line.

The effective interest rate on our credit facility during the three month ended December 31, 2011, was 6% compared to 6.7% for the prior-year period. However, our weighted average borrowings increased by 54 million during the same period. This was partially offset by an increase in investment income resulting from an increase in the weighted average principal balance of outstanding investments for the quarter ended December 31, 2011, when compared to the prior year quarter by 69 million. We increased the size of the portfolio significantly during fiscal year 2011, adding a net of 20 portfolio companies.

On a per common share weighted average basis, net investment income for the current quarter was $0.21 per share, compared to $0.22 for the quarter ended December 31, 2010. 100% of distributions paid in the first quarter of fiscal year 2012 were covered by net investment income. This highlights our commitment to sustainable distribution.

Let’s turn to realized and unrealized changes in our assets. Realized gains and losses come from actual sales or disposables. Unrealized appreciation and depreciation, comes from our requirement from accounting principles generally kept in the U.S., and marks our investment to fair value on our balance sheet with a change in fair value from one period to the next getting recognized in our income statement. Unrealized appreciation and depreciation is a non-cash event.

Regarding our realized investment activity, for the December 2011 quarter end, we had a net realized loss of 8.2 million, which primarily resulted from the restructuring of KMBQ from the sale of Newhall Holdings. There were no realized gains or losses during the prior year’s first quarter.

From a unrealized standpoint, for the December 2011 quarter end, we had net unrealized appreciation of 2.2 million over our entire portfolio, which includes the reversal of 11.5 million in unrealized depreciation, primarily related to the sale of Newhall Holdings and restructuring of KMBQ.

Excluding reversals, we had $9.3 million in unrealized depreciation for the current quarter. The remaining net depreciation was primarily due to decreases in performance at certain of our portfolio companies; most significantly Sunshine Media Holdings and GFRC Holdings. Partially offset by increases in others; most notably, Defiance and related technology.

Our entire portfolio was fair valued at 79% of cost as of December 31, 2011. The [inaudible] with this unrealized depreciation of our investment, does not impact our common ability to pay distribution to stockholders, but it does indicate that the value is lower and that there may be future [inaudible] that could ultimately reduce our distribution.

Our bottom line is the net decrease/increase and net assets resulting from operations. This term is a combination of net investment income, unrealized net appreciation or depreciation, and realized gains and loss.

According to the December 2011 quarter end, this number decreased by 1.3 million or $0.06 per share, versus an increase of 2.1 million or $0.10 per share in the prior year’s December quarter. The year-over-year change is primarily due to the aforementioned net realized losses on investments totalling 8.2 million in the quarter ended December 2011.

While we believe our overall investment portfolio is generally stable despite markdown, today’s markets move fast and are generally volatile, and investors should likewise expect volatility in the aggregate value of our portfolio.

If you look back of our history, we invested in certain companies that later suffered through problems. We have in the past helped certain of our troubled portfolio companies fix their problems, and have turned such investments around, and have generally gotten all or most of our money back. That is one of the strength we have in our operating team. We have the ability to fix certain problem companies.

And now, I’ll turn the program back to David.

David Gladstone

Thank you, David Watson, you got through all that presentation with a very bad cold. We thank you for that.

I hope all the listeners will read our press releases and study our quarterly reports called a 10-Q which we filed with the SEC. You can access the press release and the 10-Q on our website at and also on the SEC website,

The big news this quarter, we continue to make progress with the portfolio companies. Generally speaking, it’s getting stronger. We worked out two of our non-performing loans. And while we didn’t get all of our money back, we got back a large portion, and this lowers our loans on nonaccrual and also increases the income off of those that were all on nonaccrual.

We were the first BDC to complete a public offering of preferred stock, which we believe will alleviate some of our need for long-term debt. We’re still looking for long-term debt, but that helps us plug some of that.

We renewed our line of credit in January, 2012 for three years, that’s nice to have that out of the way. You know, all the bankers wanted to wait until January to renew the line of credit, and being cautious as we are, we stopped our new loan production to ensure that we had a line of credit in place before we started up again, but now we have that in place so we can go forward at a hopefully a much rapid pace.

We’re back in the market, we’re back in the marketplace looking for new deals. And at this point, I think all of this is good news for shareholders, certainly our team and all of our customers that we hope to bring in to our portfolio.

Still, our biggest challenge today is long-term debt – long-term debt marketplace for our company and for our portfolio companies. As mentioned, we have the line of credit with supportive lending institutions and the line of credit is working fine. And it will be sufficient for – as a line of credit, but we still have to have long-term funding, and we substituted the new preferred stock for a portion of that long-term funding. And I guess, we could do more if we need that. In order to make a lot of new long-term investments, we need to raise long-term debt and long-term capital, such as the issuance of preferred stocked, or certainly we’d like to do some long-term debt.

Our portfolio companies, we’re worried that they’re not able to get long-term senior loans as they need it. There are a fair number of regional banks that are making new loans based primarily on the assets of the business. And these asset based lenders are certainly more plentiful than they have been in the last three years. And I’m hopeful that at some point in time, the banks will get back and extend long-term loans to our portfolio companies. And here we’re looking for five, six, and seven year loans, and they’re just not out there right now.

I think the banks will get better as time goes on. Often times, I get questions from people of what we’re worried about. Certainly oil is still way too high at $99 a barrel. We’re still very worried about inflation and the decision by Congress and the President to expand the money supply. We’re hearing now that the budget deficit will be $1.1 trillion again, this fiscal year that ends in September. Spending by the government continues to be off the charts, and we’re now borrowing $0.43 of every dollar that we spend today, and that’s unsustainable.

The amount of money being spent on the war in Afghanistan is hurting our economy. We were glad to see that we pulled out of that bottomless pit that we were in. All of us support our troops of course, and they’re the true heros of our period of history now, and they’re risking their lives every day for us and we hope their safe return will come back soon from Afghanistan.

And of course the government is now talking again about raising taxes. I don’t know how much more taxes people can pay. We are one of the highest paying tax places in the world. The trade deficit with China, certainly, nation such as China and others like them, they continue to subsidize the industry to the disadvantage of our business. I’m filling up my gas tank this money at $3.60 a gallon knowing that in China it’s under $2, probably $1.80. So they’re about 50% subsidized on their oil and gas there. Which means, they can compete very successfully against our companies. And we watch our jobs leave the United States and go to Asia.

The continued downturn in housing, it’s continuing to go down every single month. And no one knows how many more home mortgages will ultimately fail. And that’s been the main reason for this recession, and certainly the lack of a quick recovery. And every time in Greece or Italy or someone has a problem in Europe, that comes back to haunt us in the stock market because all of our banking systems are tied together. And so many banks have loans to all of those countries.

And unemployment is far too high now. The number used by the government includes those that are working part-time but seeking full-time. And they have stopped looking, and it doesn’t include those who have stopped looking for work. A more realistic number for unemployment is probably 18%.

In spite of all those negatives, we’re still out there looking at the industrial base, and we see some good companies out there. It’s not a complete disaster. The lingering recession has an impact on our portfolio companies. And like most companies, some of our portfolio companies haven’t seen an increase in revenues or backlog. However, some others are seeing tremendous increases and we’re very happy about that of course.

It’s just a very uneven recovery that we’re seeing in the economy today. We believe the downturn that began in 2008 has reached the bottom, and we’re hopeful that the markets will continue to progress up by some pace, albeit very slow, but that’s our belief and that’s what we’re investing based on that assumption.

Distributions to common stockholders of $0.07 per common share each of the months January, February, March. And the board will meet again in April to consider distributions for April, May and June. At the distribution rate, common stock dividend based on the price of closing at $8.95 yesterday. The yield is now about 9.4 to 11.3%, extremely high for such a good solid company as ours is today.

And the distribution on our preferred stock is 7.125%. That coverage ratios is about 7 to 1, so that dividend is extremely well covered. That’s $1.78 for a year, and the stock has actually moved up to over $25 as of yesterday.

As a reminder, we hold our annual shareholders meeting, Thursday, February 16 at 11:00 a.m. at the Hilton Mclean Tyson Corner, it’s just down the street from our offices at 7920 Jones Branch Drive in Mclean. And if you haven’t voted your shares for the proxy, please remember to do so before the meeting. We spend a lot of money going after these votes, and we’d like to get them all in so we’re finished with that by the time the shareholders meeting occurs.

Please go to our website and sign up for e-mail notifications. We don’t send out any junk mail, just news about your company. And you can also find us on Facebook, the Gladstone companies, and you can follow us on Twitter named Gladstonecomps, C-O-M-P-S.

In summary, I think we’re moving in the right direction. The pace is set for us to do well in this calendar year. The term preferred offering has put in place one way of solving our long-term debt problem. And you know, folks, as far as I can see, the U.S. economy is going through a very slow recovery. And I think we’re at the bottom, and I think we’ll start-up again with some good strength in this calendar year.

We can only see a few quarters out so we’ll remained conservative and not go crazy putting deals on the books, that is our investment approach as you all know. And at this point in time, if the operator will come on, we’ll open up the lines for analyst and shareholders who want to ask some questions.

Question-and-Answer Session


(Operator instructions). Our first question this morning will come from Greg Mason of Stifel Nicolaus. Please go ahead.

Greg Manson Stifel Nicolaus & Co.

Morning, David. Thank you, gentlemen. David, you talked about how now that you have got the credit facility locked up, you are ready to start looking at new investments. As we look back last year, you did a significant amount of syndicated investments. As you are going forward, do you think you are going to continue making more syndicated investments or more of the kind of self-originated investments that you find on your own?

David Gladstone

Well, we would do more syndicated loans if we found good ones out there. They are just very hard for us to find right now because the market place, the syndicated loans is so strong, we could easily sell off our syndicated loans, or most of them, pretty quickly if we needed to. So I would say, as you look forward, we are mostly going to be doing proprietary originations rather than syndicated loans.

Greg Manson Stifel Nicolaus & Co.

Then, on the new facility, is there any borrowing base or other covenant restrictions, or will you have full access to the 137 million if you choose it?

David Gladstone

We should have full access.

Greg Manson Stifel Nicolaus & Co.

Okay, then in the Q, I think there was the right downs in Sunshine, and ViaPack and GFRC. First, on Sunshine, we saw the rate change from about 10.5 to 5%. Did that new rate take effect for the full quarter, or was the quarter partially accruing that old 10.5% rate? I am just trying to get a feel for the impacted revenues.

David Gladstone

It is at the new rate for the full quarter. We didn’t run it at all full price and then somehow book a lot of fictitious income, we booked what we received.

Greg Manson Stifel Nicolaus & Co.

Okay, and if you wouldn’t mind, just some quick comments on ViaPack that was written down $1 million. I think that is still on accrual status, but I think it is only valued at $0.17 on the dollar – just kind of your view and outlook going there for that income, and GFRC, I think that was also down $1 million; it looks like it is at $0.65 on the dollar. Can you give us an update on those two investments?

David Gladstone

Yeah, Chip is following ViaPack closer than I am and that has been one that we are in the process of turning around, but go ahead Chip.

Chip Stelljes

Sure. If you recall, ViaPack was a company that was moving along rather nicely, and performed theoretically well all the way through the downturn, until we had some significant accounting challenges, irregularities that showed up, causing us to basically have to remove the CEO and the CFO there and take control of the business. It has been a more difficult transition and we have forecasted that we do have almost an entirely new management team there.

One of the issues with write downs is that I think whenever you have an accounting irregularity; obviously that puts the entire performance of the business in question. So we’re getting our hands around it, and obviously if we commit additional capital there, it’s immediately written down to whatever percentage the loan is valued at.

So we are working hard on that one and we have got a number of individuals in the problem that are focused on it, but at this point we are trying to work through the problems that we didn’t create but we inherited.

As for GFRC – a little better story there. This company, if you recall, basically makes cladding or skins for commercial buildings and so obviously, that business has been off for a while and has not recovered from the down turn. The good news is, even though there was a markdown for the quarter, after the end of the quarter we signed a term sheet with the equity sponsor there to inject additional capital. They have plenty of liquidity, and with the additional capital coming in, we do not see any issues there on accrual through the remainder of the calendar year.

Greg Manson Stifel Nicolaus & Co., Inc.

Great, thank you for that color. One last thing, I know you said you have got $1 million success fee in the first quarter and I missed what company that was with.

David Gladstone

It was actually after the end of the fourth quarter; it was Global Materials Technologies and we had only about $2.8 million of remaining principal on that deal, and when they refinance us they pay us $1 million of success fees. So, you will see that in the quarter ending March 31.

Greg Manson Stifel Nicolaus & Co.

Great, thank you guys.


Our next question will come from David West of Davenport and Company, please go ahead.

Dave West - Davenport & Co., LLC

Good morning.

David Gladstone


Dave West - Davenport & Co., LLC

I’m first curious, you had two situations regarding non-accrual loans where one restructured and one sold. Was this part of a new strategic focus or just more opportunistic situations?

David Gladstone

I can say that the radio station was something that we have been working on for some time. We have had to put a receiver in, and of course, I got written down dramatically by our rating agency that writes those down and we used their numbers. Obviously, the return on that is dramatic, even though we had to write off some of it. I think that one is fine. Chip, why don’t you talk about the one you worked out?

Chip Stelljes

Yeah, Newhall Holdings, this is the situation that had been marked down considerably last quarter. The company had been for sale, but the consumer products basis of that revenue base had declined and the equity sponsor refused to support the business. So we had the company up for sale for a sizable amount of capital and quite frankly, the bids just weren’t there to justify it. We looked at the situation and said, this is a reasonable solution to a company that we do not have any better idea of how to turn the company around, and the sponsor wasn’t willing to support. So the assets were sold for less than we had hoped, but a better recovery than we had in March. So, we will move on from Newhall Holdings and hopefully not have that issue again.

Dave West - Davenport & Co., LLC

Do you think there is much likelihood of further transactions regarding some of the non-accruals in the current quarter?

Chip Stelljes

Don’t have one right now that I think. We actually have a company that is in the non-accrual bucket that we are negotiating a sale on that would be a good, good transaction for us if it works out. We’re continuing to work on it but I do not know if we have any indicated write-offs for the current quarter at this point.

Dave West - Davenport & Co., LLC

Just doing a quick calculation, it looked like the preferred and the borrowings of the line of credit, you have about 46%, I guess, leverage relative to your net assets. What is the comfort factor as far as increasing that to 100% before you feel like you would have to raise common equity?

David Gladstone

Generally speaking, when we get up around 50%, we start thinking about is there a way to make this lower leverage, but I feel comfortable now that we have a line of credit in place for three years, and the preferred doesn’t come through for five years, that we could probably run that up to 75%.

Dave West-Davenport & Co., LLC

Great. Then, just a technical matter, you had an item for restricted cash balance on the sheet this quarter. What does that relate to?

David Gladstone

David Watson?

David Watson

Sure, David. That relates to some escrow proceeds we received related to the Newhall sale that will run their course over the next year or so.

Dave West-Davenport & Co., LLC

Okay, thanks very much.

David Gladstone

All right, just one other footnote on transactions; we have one company that we worked out, it’s in good shape and have asked to sell it, so it looks like we will probably sell that in the calendar year that we are in. Next question, please.


Our next question will come from Brian (Burn), a private investor.

Brian (Burn) – Private Investor

Do you have any projections in terms of this coming year, or fiscal year, either in terms of dividends and/or earnings?

David Gladstone

We don’t put projections out, and we don’t do the way some people do and advise you as to what they are trying to do, other than the fact that our goal is to increase the dividend. We are in a much stronger position now that we have reduced some of our non-accruals, so the hope is that in this calendar year we can move forward and maybe move the dividend, but at this point in time there is no way of giving you a forecast on that.


(Operator instructions). We have a question from J.T. Rogers of Janney Montgomery and Scott. Please go ahead.

J.T. Rogers Janney Montgomery Scott

Morning, David. Quick question on sourcing debt – just wondering where you are looking and where you think you might be able to find additionally long-term debt capital.

David Gladstone

We capped at preferred market place because we have not been able to find a good long-term debt, but we have a couple of letters that we’ve received from some long-term lenders and we are currently working on those for both this company, and for Gladstone Investment. So we will just have to see if those pan out. They are actually cheaper than the preferred stock, but not that much. We will just have to see if the conditions on those will be limiting on our ability to move forward and also have to work out the relationship with our revolving line of credit lenders.

So, we are working on it, and hopefully we can announce something in the next six months, but we have put that in place.

J.T. Rogers Janney Montgomery Scott

Great, then the revolver, it looks like you’ve extended it out three years, making it a significantly longer maturation that you have had before. I was wondering if you were looking at adding any additional lenders to that facility.

David Gladstone

We probably won’t do that until we get into the line a lot more than we are today. We have contacted a couple of revolving lenders. Believe it or not, there are not that many lenders that lend to finance companies in the world today, so as a result, we are a little bit limiting in the number of people that are in the business of lending to business development companies.

J.T. Rogers Janney Montgomery Scott

All right, thanks a lot.


Our next question will come from Jeff Rudner, or UBS. Please go ahead.

Jeff Rudner - UBS

Good morning, David. A question for you and Chip about investment philosophy; in that you mentioned that one of your concerns was the possibility of inflation increasing again, where on the other hand, Ben Bernanke has come out recently and indicated that he is not only more concerned about deflation than inflation, but indicated that interest rates will probably stay where they are now through 2014. Obviously, there is no way of knowing or predicting how low interest rates will stay and for how long, but when it comes to investing the portfolio’s monies, the more you are concerned about inflation, obviously you would be looking to make variable rate loans, versus someone who is less concerned about inflation who would like to get a fixed rate loan, not thinking that the rates will go up over a near-term period. So, how does the conflict between you and Ben Bernanke affect the investment philosophy of the team?

David Gladstone

We are all hoping that Ben Bernanke won’t be reappointed, but assuming that he will be, we can’t judge what they are going to do. I can remember back in the early 1980s when Roker came in and took a bitter pill and we all saw rates go crazy up. So we’re protected from that happening if it should happen this time Mr. Bernanke gets thrown out and somebody with a more conservative dent gets put in.

I think it is still better for us to have variable rate loans -- they are all reasonably high. All of our loans, especially the new ones, are in the 10% or above range, even though they are variable, so as a result, we are not compromising our returns by not doing fixed-rate loans in this market place today, and we want to remain conservative in the hopes that something will go forward and the economy will be fixed. One of the fixes is going to have to be paying higher interest rates.

David Watson

Hey, Jeff, this is David Watson. I guess I would point to the fact that only 6.3% of our debt investments are at fixed rates. All of the other ones are at variable rates, and of those, 87% of them have a floor.

J.T. Rogers - Janney Montgomery Scott

Okay, great. Thanks, David, and thank you David.

David Gladstone

Okay, next question.


(Operator instructions). Mr. Gladstone, I am showing no additional questions in the cue. I would like to turn the conference back over to you for any closing comments.

David Gladstone

All right, thank you all for dialing in. We appreciate it and we look forward to some good news for you when we meet again at the end of the March 31 quarter. That is the end of this call.


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

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