Gladstone Capital's CEO Discusses F2Q12 Results - Earnings Call Transcript

| About: Gladstone Capital (GLAD)

Gladstone Capital Corporation (NASDAQ:GLAD)

F2Q12 (Qtr End 03/31/2012) Earnings Call

May 2, 2012 8:30 am ET


David Gladstone - Chairman and CEO

Chip Stelljes - President and CIO

David Watson - CFO


Barry Burns - Private Investor

J. T. Rogers - Janney

Greg Manson - Stifel Nicolaus


Good morning, and welcome to the Gladstone Capital Corporation second quarter ended March 31, 2012 shareholders conference call. (Operator Instructions) Now, I turn the conference over to David Gladstone.

David Gladstone

And hello, and good morning to all of you out there. This is David Gladstone, the Chairman, and this is our quarterly earnings conference call for shareholders and analysts of Gladstone Capital, and stocks traded on NASDAQ, symbol GLAD. And we also have a preferred stock now traded on NASDAQ under the symbol GLADP for preferred.

Both of those are in the global select trading and markets. And you've noticed our recent transfer of the listing from our preferred stock from the New York Stock Exchange and NASDAQ. And I'll talk about that a little later.

Thank you all for calling in. We're always happy to talk to shareholders about the company. I wish there were more, we talked about having an interim call and news on that, yet. We hope you all take the opportunity to visit our website at, where you can sign up for e-mail notices. You'll receive information about your company in a very timely fashion. So it's a good place to get information.

Please remember that if you're in the Washington D.C. area, you have an open invitation from us to visit us here in McLean, Virginia; a suburb of Washington, D.C. Please stop by and say hello, if you're in the area and see some of the finest people in the business.

And now, let me 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 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 maybe based on our current plans and we believe those plans to be reasonable.

Many of these forward-looking statements can be identified by the words such as anticipate, believe, expect, tend, and will, and should, and may, and all of those kind of similar expressions. There are many factors that cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including those factors listed under the caption "Risk Factors" in our 10-K and 10-Q filings, and certainly in our perspectives filed with the Security Exchange Commission.

All of those can 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 after the date of this conference call. Please also note the past performance or market information is not a guarantee of future results.

Well, we'll start off the presentation as we always do with President, Chip Stelljes. Chip is our Chief Investment Officer of all the Gladstone publicly traded funds, and he'll provide a review of the company's last quarter. Chip?

Chip Stelljes

Good morning. This quarter the second quarter of our fiscal year, we invested $8.5 million in one new portfolio company. We continue to focus on managing our portfolio, investing $7.9 million in existing portfolio companies in the form of additional investments or withdrawals in revolving facilities.

During the quarter, the company had repayments, which included normal amortization and pay-down from revolvers of approximately $13.7 million. This also includes three early payoffs at par during the quarter, which generated success fees of $2 million during the period and a total average return on those three deals of 14.8%.

So in total we have a net production increase in our portfolio of approximately $2.7 million for the quarter ended March 31, 2012. We funded this net increase and production from operating and current withdrawals on our credit facility.

As mentioned on our last call, we extended the maturity days 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 amended credit facility maybe expanded to a maximum $237 million through the addition of other committed lenders to the facility.

Interest rates remained unchanged in the amendment. They're not for the 5.25%, and all of the terms of the facility were substantially unchanged. Subsequent to quarter-end, we invested $0.7 million in four existing portfolio companies and we received $1.8 million in repayments.

We continue to see solid investment opportunities in an improving marketplace, which are in line with our investment objectives, although, there seems to be a good deal of capital and competition in the market for the most attractive deals. We are pretty far along in the closing process on two proprietary investments totaling $26 million and expect to close them in the next few weeks if not days, so we expect to move there.

As our pipeline continues to build or expect our production will increase in the next quarter or two in accordance with our objectives. We're very pleased we're able to access the long-term capital market in November 2011, by raising $38.5 million in term preferred stock. We believe this along with the extension of our credit facility until 2015 will provide us the capital to grow the portfolio and increase our net investment income over the long term.

At the end of the second quarter of 2012, our investment portfolio was evaluated approximately $288 million versus a cost basis of $373 million or approximately 77% of cost. With fair value to cost percentages lower than last quarter, which was 79% resulting from continued declines in company performance in certain of our portfolio companies and the early payoff of some good loans.

At the end of our first quarter, we had eight portfolio companies either fully or partially on non-accrual status. We added the last-out tranche of our both Sunshine Media Holdings and Viapack to non-accrual status effective January 1, in order to get them some breathing room if they move forward with their business plans.

We're able to decrease our non-accrual companies last quarter by two, through sales and restructuring. And we remain focused on managing the other portfolio of companies (technical difficulty) with more of them off of non-accrual status over the next several quarters.

The investments classified as non-accrual are the cost basis of the $43.8 million or about 12.1% of the cost basis of all debt investments in our portfolio as of March 31, 2012. From a fair value perspective the non-accruals fair value represent $4.6 million or about 1.7% of the fair value basis for all debt investments in the portfolio at quarter end.

As a lender, we continue to have a high concentration of variable rate loan, so when rates begin to increase, we should have higher income. And while our rates are variable, they usually have a minimum rate of 4, so the effects of declining interest rates were mitigated.

We target to have a large part of our portfolio with variable rates, a company with minimum floors with the remainder of this rate. As of March 31, 2012, approximately 88% of our loans at cost have floors and 6% of our loans do not have floors or ceilings, and the remaining 6% have relatively high fixed rates.

Weighted average floor of our variable rate loans is 2.4%, with an average margin of 8.4%, resulting in all an average rate of 10.8%. Another measure of the quality of our assets is that average risk ratings on our overall debt investment portfolio for the quarter remain relatively stable.

Our risk rating system tends to measure the probability of default on debt securities and the probability of loss in the default by using the 0-to-10 scale. Zero represents a high probability to default and 10 represents a low probability of significance. Our risk rating system for our non-syndicated loans, which constitutes about 74% of principal balance of our debt, showed a weighted average rating of 5.5 as of the quarter end, which increase from where it was at fiscal yearend at 5.3, representing slightly a lower probability default.

As for our rated syndicated loans, which make up 17% of the principal balance of our debt investments, they had a weighted average rating of B, B2 for the quarter-end, which remained unchanged from fiscal yearend. Our unrated syndicated loans represent about 9% of the principal balance of our debt investments, and had a weighted average rating of 4.9, which was down slightly from 5.0 at fiscal yearend.

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'd be required to pay out cash in distribution to our non-cash income. We had no pick income during the first and second quarter of the fiscal year 2012, in fact minimal amounts in fiscal 2011.

We recorded original issue discount income in the second quarter of 2012 of $100,000, which is consistent with prior quarters. And we recognized success fees over the past quarter of $2 million. As a reminder, success fees are contractual due upon the sale of the portfolio company and are generally not recognized until they're received.

To provide a little color at the amount we have in our portfolio as of March 31, 2012, approximately 45% of our interest-bearing debt and 64% of our proprietary debt had success fees related to them, and have an average contractual accrual rate of about 2.5%. In all we have approximately $13.9 million in accrued success fees, which are not reflected on our balance sheet as of March 31, 2012, on our debt investments that are on accrual status. There are no guarantees that we'll be able to collect all the success fees and know the timing of such collection due to their contingent nature.

The senior and senior subordinated debt marketplace for larger middle-market companies continues to improve albeit and consistently. And we believe there are still encouraging economic trends in this marketplace coupled with some descent liquidity.

The market for loans for companies at the low-end of the middle market, in which we seek to invest our capital are seeing more competition, but not again from banks. Competition is really coming from other public fronts like ours and many small private fronts. Our loan request pipeline has been building, in addition to the two pending investments that I mentioned and we hope to show you small quality investment over the next several quarters.

And with that, I'll turn the presentation back to David.

David Gladstone

All right, Chip. A good report. Now, let's turn to the financials. For that we'll hear from David Watson, our Chief Financial Officer.

David Watson

Good morning, everyone. Yesterday we released our fiscal second quarter earnings press release and 10-Q, which I hope you've had a chance to read. On this call I will cover some our financial highlights, starting with the income statement.

For the second quarter ended March 31, 2012, net investment income was $5.2 million versus $4.4 million for the same quarter last year, an increase of 17.8%. This increase was primarily due to an increase in interest and other investment income.

Interest income increase by $1.7 million or 22.8% during the three months ended March 31, 2012, as compared to the prior-year period. This was due to an increase in overall portfolio size as compared to the prior-year period.

The annualized weighted average yield on our interest-bearing debt investments were 11% for the second quarter at 2012, as compared to 11.3% for the second quarter of 2011. The decreased in the yield is primarily due to increase syndicate investments, which generally bear lower interest rates. As well as restructuring of certain of our debt investment interest rates into lower yields.

Other investment income totaled $2 million for the three months ended March 31, 2012, an increase 84.3% over the prior-year period and resulted from success fees from the early payoff at par by two of our companies.

Offsetting these increases in net investment income were the increases of $1.2 million in aggregate of interest and dividend expense, due to increased borrowings under the credit facility and the payment of the term preferred dividends. Our weighted average borrowings including our term preferred stock increased during the three months ended March 31, 2012, by $86 million over the prior-year period.

For the six months ended March 31, 2012, net investment income was $9.6 million versus $9.1 million for the same period last year, an increase of 6.3%. The increase was primarily due to an increase in interest and other investment income. These are the same reasons that are described for the quarter in the increase. Again, offsetting these increases to net interest income or the increases of $2.9 million in aggregate of interest and dividend expenses, again due to the same reasons described for the three-month period.

On a per weighted average common share basis, net investment income for the current quarter was $0.25 per share compared to $0.21 for the quarter ended March 31, 2011. Net investment income per weighted average common share for the six months ended March 31, 2012, was $0.45 per share compared to $0.43 per share for the six-month period in the prior year. 100% of distributions paid in the first and second quarter of 2012, were covered by net investment income, which highlights our commitment to the conservative distribution policy.

Let's turn to realized and unrealized changes and fair value of our assets. Realized gains and losses come from actual sales or disposables of investments. Recognition of net unrealized appreciation and depreciation on the income statement as a U.S. generally accepted accounting principle or GAAP requirement to mark our investments to fair value on our balance sheet, with a net change in fair value for the reported period getting recognized in our income statement. Unrealized appreciation and depreciation is a non-cash event.

Regarding our realized investment activity, we had minimal realized net gains for the second quarters of both 2012 and 2011. For the six months ended March 31, 2012, we had a net realized loss of $8.2 million, which primarily resulted from the sale of KMBQ Corporation and Newhall Holdings.

From an unrealized standpoint, for the March 2012 quarter-end, we had net unrealized depreciation of $7.2 million of our entire portfolio. The largest drivers in our net unrealized depreciation for three months ended March 31, 2012, were the unrealized appreciation of the reinvestment, primarily resulting from a continued decline in these portfolio companies financial and operational performance.

At March 31, 2012, the fair value of our investment portfolio was less than its cost basis at approximately $84.8 million. And our entire investment portfolio was valued at 77.3% of cost as compared to cumulative net unrealized depreciation of $77.6 million, and evaluation of our entire portfolio at 79.1% of cost at December 31, 2011.

The cumulative net unrealized appreciation of our investments does not impact our current ability to pay distributions to stockholders. But does indicate that the value is lower and that there maybe future realized losses that could ultimately reduce our distributions. Our bottomline is the net decrease and net assets resulting form operations. This term is the combination of net investment income, net unrealized depreciations or appreciation, and net realized gains or losses.

In the March 2012 quarter-end, the net decrease in net assets resulting from operations increased to $1.6 million or $0.08 per common share versus $8.4 million or $0.40 per common share in the prior year's March quarter. The year-over-year change is primarily due to the $13.1 million in unrealized depreciation recorded in the second quarter of 2011 on our investments.

For the six months ended March 31, 2012, the net decrease in net assets resulting from operations increased to $2.9 million or $0.14 per common share versus $6.2 million or $0.30 per common share in the prior year's period. The year-over-year change is primarily due to the $16 million in unrealized depreciation recorded in the six months ended March 31, 2011, on our investments.

Moving over to the balance sheet, as of March 31, the second quarter of our fiscal year, we had approximately $311 million in total assets, consisting of $280 million in investments at fair value and $23 million in cash and other assets. Our borrowing totaled $65.8 million at cost on our line of credit.

In addition, as mentioned in our last call. During the first quarter of fiscal 2012, we completed the public offering of 1.5 million shares of 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 proceeds from the offering to repay a portion of the outstanding balance on our line of credit.

Due to its mandatory redemption feature, we classified the preferred stock as a liability on our balance sheet as of March 31, 2012. 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 are amortizing over the redemption period ending December 31, 2016.

For the quarter ended March 31, 2012, we had $202 million in net assets as compared to $240 million in net assets as of our fiscal year ended September 30, 2011. This represents a NAV per common share of $9.62 as of March 31, 2011, as compared to $10.16 as of September 30, 2011. Therefore we continue to be less than one-to-one leverage and we believe that our overall risk profile is low.

At the time of this call, we have about $32 million available on our $137 million line of credit and $32.4 million in cash. And we have the ability to deploy more capital for the right opportunities in line y with our investment strategy.

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

David Gladstone

All right. Thank you, David Watson. That's a very good presentation, very thorough. I hope all our listeners will read the press releases that we put out and study our quarterly report as well as the 10-Q we filed those with the SEC yesterday. You can access the press release, the 10-Qs, and all of our other reports on our website at and also on the SEC website.

I think some of the big news this quarter was despite the sluggish economy, we're able to continue to make progress with our portfolio companies and exit a few of them as well. We received $2 million in success fees from a couple of the exits and that paid-off at par.

I do want to just stop and say, I don't think we get a lot of credit for not using the non-cash ways of increasing income that is paid in time. Those are all phantom income, with no income really coming in. But here we use success fees, as you can see this quarter, we got $2 million of those in and we didn't recognize that until we got the cash unlike paid into our income.

The other big news is renewed our line of credits in January for three more years. And also our pipeline is improving. We have a lot of new investments that are coming along. We expect to close several proprietary deals over the next few weeks. In fact, one may close this week, which will move us right along in the direction that we want to go in the second half of 2012.

In February 2012, we held our Annual Shareholders Meeting, where all of the proxy proposals that we and the proxy, including the one to sell. Our common stock at price below NAV per common share was in there. All of those passed and that's been reported in as well to you and all the folks out there.

At this point, I think all of these are good news for our shareholders, and our team and our customers. And I think we're on the right track to show some big improvement in 2012.

Our biggest challenge today is long-term debt for our company as well as our portfolio companies. We have a great line of credit and supportive lenders for our line of credit, but that's all short-term. And we believe it's sufficient for the near term and it helps us do deals and then turn around and refinance them with hopefully long-term debt.

We issued some preferred stock as a substitution for long-term debt. And this will help us make a lot of long-term investments that we need in the future. And we need to raise additional long-term debt or long-term capital such as the issuance of preferred stock in the future, in order to continue our growth.

We also worry that our portfolio companies may not be able to get long-term senior loans that they need. There is a fair number of regional banks today that are making new loans, based primarily on the assets of the business. And all of these asset-based lenders are certainly much more plentiful than they were even last year.

And we hope to get some of the banks to extend long-term loans to our portfolio companies. And I think the banks will be better this year than they were last year, although everything is still very tied up at some of the banks.

Our concerns continue to be oil prices. Oil and gas prices are high. And high gas price of course for cars and trucks hurts every business in the United States. And we're worried about inflation, the decision by Congress and the President of U.S. to expand the money supply will ultimately cause serious inflation.

And I know, some of you who are economist follow the M1 M2 numbers. And while they are up, the velocity is way down from compared to where it should be. And so that's a real drag on the economy today.

The spending by the federal government is off the chart. The government can't continue to print money, the way they do. They're now borrowing 43% of every dollar that they spend. And the remainder of 2012, it will probably be up around 50%.

As most of you know, we sold a lot of our debt to China over the past years. China has now stopped buying our debt. They're actually selling our debt into the open marketplace. The fed is the one that's buying all the money and that's just equivalent to printing money. And so in essence, they're running the printing presses over the government in order to cover deficit spending.

And so the amount of money that we're spending, not only on our own things here at home, but also in places like Afghanistan is hurting our economy. We certainly support all of our troops. They're in Afghanistan. And hope they come home safe and very soon as has been promised.

And of course, the government is now talking about raising more taxes. They don't talk about cutting spending, but they do talk about raising taxes. And I just don't know how our economy can compete around the world at huge taxes on both businesses as well as individuals.

Trade deficit with China, I mention this each time only because it's so terrible. China continues to subsidize the industries to the disadvantage of our businesses, when they're competing for business around the world. This of course means that our companies can't compete with them. And that's the reason, the job leave the United States and go to places like Asia.

The continued downturn in the housing industry and the related disaster in the home mortgage default area continues to drag down the economy. And no one seems to know, how many more home mortgages will be ultimately failed and people have to move out of their houses. But there is a terrible thing going on out there in the marketplace and until that stabilizes, I don't think we're going to see a lot of progress there.

We see the economic problems in the Eurozone and that may hurt some companies. But we don't have any investments in Europe. And our investments in our U.S. companies don't have that much contact with Europe or any other parts of the world. They're mostly in the United States. And so we are very lucky from that perspective.

And unemployment in the U.S. is far too high. It has made some significant changes over the last months. And we're hopeful that that will continue. But I would remind you again that the number you use by the government as to who's working and who's not is very flushed up.

A lot of people are working part time. They are seeking full time work. There are a lot who have stopped looking at all and those are not counted. I think a more realistic number at least, the ones I've seen using, the rates that we should be looking at are about 18% in the United States of people that are underemployed or not employed at all.

In spite of all the negative, the industrial base that is what's left of it in the United States is not a disaster. The lingering recession have an impact on our portfolio companies, but again it's not a disaster like it was in 2009.

Like most of the companies, some of our portfolio companies have not seen in entries, in revenues or in backlogs. However, others in our portfolio are seeing incredible increases and a few others are seeing astronomical increases. So we're seeing a very uneven economy at some industries and some companies do well, and others are still lagging way behind.

We believe this downturn that began in late 2008 has reached the bottom. And we are beginning to see some economic improvement. I don't see another downturn coming, but I don't see a big upturn coming as well. A very poor economy that we're in right now, and I just don't think the U.S. government has done enough to help at the rate if they would let the banks lend more; it would be great if they would reduce the regulations that are on so many businesses now.

Our monthly distributions to our common shareholders continues to be $0.07 per common share for each of the month ending April, May and June of 2012. And the Board will meet again in July to consider the monthly distributions for July, August, September of 2012. Current distribution rate on our common stock with a common stock priced at about $8.01, as it was yesterday and it closed. The yield on the stock today at 10.5%. I would tell you that that's a very high distribution continuing the strength of our company.

Another thing to look at is our monthly distribution on our preferred stock that's 7.125%, which translates into $0.1484 per month or $1.78 annually. The term preferred stock is closed at a market price yesterday of $26. That means the yield is 6.85%, down from that 7.125% and it shows the strength of the preferred stock.

As you noticed, we told you we switched from New York Stock Exchange over to NASDAQ Global Select Market. And it trades under the symbol GLADP. We moved it over there, because all of our stocks were traded on NASDAQ. We only have the one item on New York Stock Exchange.

And quite frankly, it was very difficult to manage both ways. So in order to cut cost, we changed it over and it just started trading yesterday. As all of our companies are there on the NASDAQ Global Select. And you can find them all by just typing in for example on the preferred, GLADP, and you'll get a quote.

Now, please go to our website at and sign-up for e-mail notification. We don't send out junk mail, just news on your company. And you can also find us on Facebook, under the keyword, The Gladstone Companies, and you can follow us on Twitter. We don't put a lot of information on twitter. But you can find us at GladstoneComps and we'll try to keep the information flowing.

I think we're moving forward at a good pace now, with the proceeds netted from the preferred stock offering. We should show some good progress in this fiscal year that end September 30, 2012. You know folks, as far as we can see the U.S. economy is going to a very, very slow recovery. I think the economy has reached bottom. I think we're moving up now.

Next two quarters will help us all figure this out. But remember we are stewards of your money. We'll stay the course and continue to be conservative and disciplined in our investment approach. And I hope all of you continue to follow and see the stock as a good opportunity to acquire at a low price.

If you'll come onboard now, we'll open up the lines to analyst and to shareholders, who want to ask some questions.

Question-and-Answer Session


(Operator Instructions) Our first question will come from Barry Burns, Private Investor.

Barry Burns - Private Investor

I'd just couple of quick questions. One is what are you seeing in terms of private equity with regard to some of our portfolio companies. Are you seeing more interest in terms of opportunities there? Number two is, do you have an appropriate level for what you think are the draw at any given time on our credit facilities. And then last question is any thoughts assuming of things being equal, what would you gestimate meet the likely of being able to increase the dividend this calendar year.

David Watson

Private equity question, we do see private equity companies come in and look at some of our companies for acquisition, particularly these smaller businesses for the larger private equities or good what they call a bolt on that is their rolling up an industry. They will come and buy those. We are looking at one right now that we may sell during the next six to eight month, who knows at this point in time.

And then, as you probably know, Barry, there just tons of private equity dollars out there to buy companies. There is a lack of subordinated debt and that's where we play a role. But it's a very profit marketplace from return standpoint of private equity. They've got plenty of money and they're spending it.

On the credit facility, we like to leave some room under the credit facility. Obviously we've got plenty of room today, since we've paid it down all the preferred stock. So we are in great shape. I don't really have a number other than obviously as we get close to the magic number of two to one leverage or as we get close to the fact that the borrowings are getting up close to the amount that we have under the line of credit.

We end up either stopping investing as we have done in the past or we raise common stock or deferred stock in order to pay it down. And I would say once we've cross the $100 million mark and move up to say $110 million. That would be start to get us and a point in time when we would feel like we really need to look at world a different way. We don't want to go up against the tall line of credit and have no room for anything. So you have to watch for that.

And in terms of being able to increase the dividend, we've got a couple of problems in the portfolio that I want to fix before we consider increasing the dividend. And I think as we add a couple of more transactions to the portfolio. You will see the income begin to increase.

And I think as we've fix a couple of more of these you'll see that this summer I think and we'll be a the position to discuss maybe in for our June quarter, but certainly for our September quarter, start to discuss what we might do in our year ending September 2013 in terms of the increasing the dividend but probably nothing during the summer in terms of increasing the dividend.


The next question comes from J. T. Rogers of Janney.

J. T. Rogers - Janney

I guess first, it sounds like you got two new deals on the Horizon, can you provide any detail on what industry that they are in and maybe where you're seeing the best opportunity?

David Gladstone

J. T. I wish I could answer that question. That's the sort of the kiss of death when you talk about one that's about to close. It just seems like it slows it down. So rather than talk about it, I'm afraid you're going to have to wait for the press release to get the information.

J. T. Rogers - Janney

You also have I guess over the next six to twelve months a number of scheduled maturities, I was wondering, if you're seeing the new deal for essentially replacing those deals out there, refinance stock or do you on balance, what do you think your current borrowers are thinking in terms of I mean refinancing mature debt or restructuring there existing investments with you.

David Gladstone

Chip Stelljes is going to answer that one.

Chip Stelljes

It's a mix bag. I mean we have scheduled in our projections internally all of our contractual repayments debt. We are expecting, we know one of our companies that's sizable investment is going to be put up for sale. We've been invited being part of the process of financing that deal with the new buyer which we may or may not to do the company that is.

We do seem to have enough pipeline right now to replace the maturities that are coming. So we can get them all across the line or not, I don't know. At least one company that we were told that we were going to be taken out of because there were going to sell it, they have now changed their mind and they've asked us to coming in, finance an acquisition with them.

So it's moving pieces all the time depending on a number of these private equity shops that we're working with and what they're trying to accomplish for their portfolio. But do like the pipelines to good enough that it's scheduled repayments come in and then we'll be able to replace them.

And in some cases, hopefully higher yielding debt, because the number of these were very successful companies in over the time period, returns have come down as we kept those loans on the books.

J. T. Rogers - Janney

On the portfolio, looking at you know BAS, Heartland and Sunburst Media, I guess they continue to be weak, might if that some of that's been attributable to yields set before to you know weak auto advertising. Just wondering if you can talk about more about what's going on with these companies and sort of what the risk is that we maybe seen an uptick on non-accruals, given that these guys are bring value that $0.50 or below on the dollar.

David Gladstone

While I'll let Chip go into that but just as so everybody knows, we trying not to go into detail on our per company basis. Simply because these are private companies and they haven't given us permission to go on and talk about their numbers. But Chip you want to talk about that area.

Chip Stelljes

The ones you mentioned, BAS, Heartland, Legend, Sunburst are radio stations, all four are radio stations. And that obviously is still sort of out of favor and I think the marks may reflect that on those.

I would say that number of those aren't doing worse than they have been doing. They are all performing in that and they're making there interest payment. One or two of those have had some challenges making principle payments. But we are not injecting any capital into them and they're making their payment. So at least one of those is threatened to refinance which will be bind.

But there is one of the ones today, we don't want to talk about individual, one is struggling more than the others. But the others are back where they have been so I think the marks are reflective of S&P and not necessarily indicative of the situations deteriorating.

J. T. Rogers - Janney

It seem like there were a lot of mark downs during the quarter in terms of fair value to sort of across the board and anything changed at S&P, anything changed for with their fundamentals, for the portfolio broadly so I would have that thought that you know might have seen more portfolio appreciations rather than depreciation this quarter.

David Watson

I don't think there been any changes at Standard and Poor's, who give us a marks. Obviously, the Board of Directors as the final determined and they followed S&P. I don't think they have ever changed in S&P mark. But they do make the final determination. So I wouldn't blend it on S&P rather then they continue to be very conservative, very rear view mirror looking in terms of the world never looking for the future. So as a result, I would say that it's just sort of standard operation is going on in the marketplace. And I can't attribute it to anything at this point.


Our next question comes from Greg Manson of Stifel Nicolaus.

Greg Manson - Stifel Nicolaus

Lot of my questions have been answered. But I guess one question I had on Sunshine Media. You had restructured the debt, reprised those interest rates lower last quarter. So I was surprised to see the term BP has gone non-accrual. What's the potential for that $17 million first lien piece going on non-accrual given that it's $0.15 on the dollar? How should we be thinking about our confidence in that piece remaining on accrual status?

David Gladstone

Well, Chip is close to that one.

Chip Stelljes

I'm not going to talk too much about Sunshine particular, but Sunshine as we mentioned before in this call, as the work in progress. We've been maneuvering this company to the higher-value add products and services that takes time in investment. We've lowered the interest burden to the company this time through to give them some more running room.

With that, two Gladstone professionals dedicated almost full time to the company and we're working with the senior management team there. We've been working hard on this one, but there is the possibility that we may have to place the entire investment on non-accrual. That the efforts that we're placing on it don't translate into a stronger company and better results. So we're starting to look at that as an option that we obviously are not excited about but we want the company to succeed.

David Watson

Can I just add thing on Sunshine, they have the new products that they introduced that haven't taken off as quick as possible. They are incredibly strong products for hospitals and this is for marketing for hospitals. And it's just taking guess we should have planned it a little bit different but their product, once it's compared to any of their competitors, which aren't even close in terms of the dynamics of the product.

It's a software product. Assuming that product takes off as it should overtime this will be a dynamite company. It's just going to take us a longer time to get there than we've ever anticipated and that was the mistake that we probably made on that as determining that it would happen sooner rather than later.

But once this software gets in place, it's pretty much guaranteed to stay in place because it is so strong for the marketing and hospitals. And I would guess, that next year when we look back at that product we'll have blossom and it's in, I don't know half a dozen hospitals now.

So just give it a little more time, we're trying to ease up on them and not accrue a lot of interest in order to give them breathing room to market that product.

Greg Manson - Stifel Nicolaus

And one last question, one of your big winners in the portfolio defiance, you've got almost $9 million of appreciations that common stock piece. What's your ability to affect the monetization of that equity piece and be able to redeploy into yielding assets.

David Gladstone

The good news is that that's one that's as there are others as well but that one is going along at extremely fine rate. And we've had enquiries about it from a number of different buyers. And I don't what we'll do there but you just have to stay. I think that could be sold and obviously given the losses that we have from our product periods we would shelter that capital gains and redeploy it into something that would be income producing. Little bit early to talk about it. Although, lots of activity there.

Greg Manson - Stifel Nicolaus

And do you control the exit timing on that investment or is this controlled by a private equity guy and subject to what there decision is?

David Gladstone

Chip's is riding that's one, so I'll let him finish out.

Chip Stelljes

The answer to the question is we do control the exit on it. The story here which is a good one for us is this was a private equity backed something with that in the downturn, the private equity guys watched from the deal and we've supported to work with management and now we are in control of the company.

David Gladstone

Okay, Greg. Thank you for your question, do we have some other questions.


(Operator Instructions) This time I'm not showing any questions, so this concludes our question and answer session. I would like to turn the conference back over to Mr. Gladstone for any closing remarks.

David Gladstone

All right, thank you so much for all of your questions and we enjoy this time together. And if you have questions, you can lobby them to our Investor Relations person and Lindsey is always ever present at the company and ready to take your questions and hopefully she can answer them.

And that's 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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