Gladstone Investment Corporation F1Q08 (Qtr End 06/30/08) Earnings Call Transcript

Sep.23.08 | About: Gladstone Investment (GAIN)

Gladstone Investment Corporation (NASDAQ:GAIN)

F1Q08 Earnings Call

August 7, 2008 8:30 am ET


David Gladstone - Chairman, Chief Executive Officer

David A.R. Dullum - President, Director

Mark Perrigo - Chief Financial Officer


Jon Arfstrom - RBC Capital Markets

Christopher Singley - Singley Capital Management

Jeff Rudner - UBS

[Lee Carter] - Private Investor


Welcome to the Gladstone Investment first quarter 2008 financial results. (Operator Instructions) It is now my pleasure to introduce your host David Gladstone, Chairman for Gladstone Investments.

David Gladstone

Good morning to all of you who have dialed in. My name is David Gladstone and this is the quarterly conference call for shareholders and analysts for Gladstone Investments, trading symbol GAIN. We thank you all for calling in and we love these times that we get together with shareholders and get to answer questions. We are in McLean, Virginia, a suburb of Washington D.C. so if you’re ever in this area, please stop by and say hello. You’ll see a great team at work. I really do believe they’re the best in the business.

Now let me read a 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 the Securities Exchange Act of 1934 including statements with regard to the future performance of the company. These forward-looking statements inherently involve certain risks and uncertainties even though they are based on our current plans and we 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 or implied by these forward-looking statements including those factors listed under the caption Risk Factors in our periodic filings with the SEC. That’s our 10Ks and 10Qs. 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.

We will begin a new tradition at this company. On this call at this time and in the past I did all the talking, but we have a lot of talented people at the company so we’ve invited some of them to talk to you. I know shareholders like to hear from some of our fine team. I’m not going any place but at this time shareholders should know that we have a great team and we should hear from them, and you’ll hear from some of them today. As I said I’m not going anywhere and neither is Chip Stelljes. We just want to make sure that all the people, the top people here, are heard from. First we’ll hear from Dave Dullum our President. He’ll cover production of the new investments, our pipeline, the valuations, the quality of assets and those kinds of things with a view to the future of this fund. Dave Dullum, go ahead.

David A.R. Dullum

First, to our investment activity and production. We invest principally in buyout transactions where we buy small businesses with our management team and private equity sponsors. We have also invested in the senior syndicated loans of large and middle market buyouts; however we are limiting our activity here.

First to the buyouts. For the first fiscal quarter ending June 30, 2008 we invested in one new buyout for a total of approximately $5.75 million. We did not exit any buyouts. It is too early to expect exits from any of these investments because we have not been in them long enough to see an exit. Perhaps in a year or so something will materialize. For our buyouts after the quarter end, we did make any new or exit from any buyouts at the end of the quarter.

Turning to the syndicated loans. During the quarter we did not invest in any syndicated loans. During the quarter ended June 30, 2008 we received repayments and sales of syndicated loans of about $14.7 million including normal amortization. We realized the loss of $1.7 million on the syndicated loans that we sold, and as we have mentioned in previous calls we are slowly selling off our syndicated loans. We also had pay-downs from other loans of about $2 million for a total of $16.7 million in sales and repayments during the quarter.

Subsequent to the quarter end we exited one syndicated loan due to a foreclosure sale. We had anticipated this event at the quarter end, and in the second quarter we will recognize a realized loss of around $2.4 million. There is a possibility here of future proceeds resulting from a distribution sharing arrangement with the new owner which is difficult to quantify at this time.

Turning to our investment status. At the end of the June 30 quarter we had at cost $203 million invested in buyouts and $138 million invested in syndicated loans. At the end of the quarter our investment portfolio was valued at about $320 million with a cost of $341 million for a difference of around $21 million. Our portfolio therefore is now valued at about 94% of cost. A significant amount of that depreciation actually happened in the prior quarter, while for the quarter ending June 30, 2008 the cost basis of the portfolio depreciated only about 1.8%. We may have reached the bottom of the spiral down in the value of our syndicated loans.

I do wish to call your attention to an important aspect of the valuation methodology which we are using for the equity portion of the investments where we have a large ownership position. The valuation methodology we adopted for those investments is based on a multiple of unaudited earnings, or as we call it EBITDA or cash flow, of the portfolio companies. We believe this is indicative of what the business could be sold for at the time of valuation. When a company has good cash flows the end of price value of that portfolio company would go up, and if that portfolio company has poor cash flows or no earnings, the end of price value would go down. This is the way the stock market generally values a business. Therefore, if a company has very low cash flows or a loss, then this method will result in an equity value that is very low or possibly zero even though the business fundamentals are sound. So we believe this valuation method is very conservative when companies have poor or no earnings at the time of valuation. As a result this method will produce volatility in the value of the portfolio.

Turning to our record. Since our inception in July 2005 we have completed 11 buyout investments for a total of approximately $203 million at cost and we have not exited any of these buyouts. Since July 2005 we have made 72 loans in the senior syndicated area for a total of approximately $308 million. Over time we will exit all our syndicated loans with the proceeds directed to buyouts.

I do wish to mention that one of our buyouts is underperforming but we do not think it will produce a loss. On the other hand, most of our other buyouts are performing very well.

On our loan ratings, our average loan ratings from the March quarter remain relatively unchanged. The risk rating system we use set our originated loans at an average of 5.5 for this quarter versus an average of 5.5 for the March 31 quarter. The risk rating we use for unrated syndicated loans was an average of 7.2 for this quarter versus an average of 7.1 for the March 31 quarter and fiscal year end. Our risk rating system gives you a probability of default rating for the portfolio with a scale of 0 to 10 with 0 representing a high probability of default. We see the risk in this portion of the portfolio staying relatively the same as last year As for our rated syndicated loans, they had an average rating of BB2 for this quarter and B+/B1 for the March quarter fiscal year end.

We are quite satisfied with our current portfolio mix that it will be changed over time to be 100% in buyouts where we have large investments as we reduce the amount of syndicated loans in our portfolio.

Turning to our rate issues, we have concentrated on variable rate loans in the syndicated market so that we are no hurt if rates increase and therefore our cost of borrowing increases as well. While our rates are variable we often have a minimum or floor on the rate charge so that if interest rates decline, it will not hurt our ability to pay dividends. We do have $57.9 million in fixed rate loans. All of these are in our buyout deals and they’re at relatively high rates so we should be okay there.

In order to have some protection on our cost of funding we purchased interest rate caps on about $60 million of our debt. We do this to keep our loss to a minimum if rates do rise.

Regarding our pipeline for new deals. Our pipeline of investment opportunities currently is robust and includes mezzanine with equity pool investments and other junior capital instruments.

As to the market place, since the call to shareholders last quarter the syndicated loan market face for large and middle market companies which came to a halt in the summer of 2007 seems to be slowly coming back. Given the uncertainty in this market and our goal of reducing this portion of our portfolio, we have stayed out of the syndicated loan market. As many of you know the value of loans in that market have declined and our portfolio of syndicated loans have generally tracked the market.

However this time the fair value of our syndicated loan portfolio excluding those sold during the quarter increased in value by about 4.5% from last quarter. Again I think we may be seeing the bottom of the market. The syndicated loan market is for larger companies and given the weakness in that market and our portfolio objectives, we are not buying any of those loans at this time.

For the buyout market of smaller companies where we focus, the world is different. The small business market place of companies with strong growth rates are still being valued at high multiples of earnings. We have seen companies with good growth rates being valued at about eight times cash flow. This is still a high price to pay and some buyers are not able to raise all the financing which may lead to some downward re-pricing of these buyouts in the future. This market is finding it difficult to raise the debt to leverage of these companies.

On the other hand, businesses with lower growth rates are being purchased for lower multiple cash flows. This is where we have been concentrating and have been successful in financing some of these while building our pipeline. As we continue to participate in these buyouts and grow our portfolio, our balance sheet will reflect the mix of debt and equity co-investment that we provide for these acquisitions. This mix allows us to generate income from the debt investment portion to pay out as dividends while we build the equity portion for future capital gains. I believe the rest of the year will be okay for us and we will continue to grow our asset base and the dividends should follow that trend.

Given the conditions in the market, I think we’re well positioned to achieve our objectives. Our goal and outlook for this fund is to maintain the consistency of our dividends while achieving solid growth in the portfolio of proprietary investments in the small business buyout market.

David Gladstone

That was a good report. We’re excited to have you on board and working on the buyout side of the business. I know this fund is going to pick up steam in the second half of the year and really going to kick off very well.

Now let’s turn over to our CFO, Mark Perrigo. Mark is on board here for not so long but he’s ready to go today. Mark, give us your report.

Mark Perrigo

I’ll begin with our balance sheet. Our balance sheet continues to remain strong. At the end of the June quarter we had approximately $129 million borrowed on the line of credit and we had about $237 million in equity. So we are blessed in 1 to 1 leverage. It is a very conservative balance sheet for a company like ours. We continue to believe the risk profile is low. Our line of credit is approximately $200 million.

Regarding the income statement, for the June quarter net investment income which is before appreciation, depreciation, gains or losses was about $3.1 million versus $2.9 million for the quarter last year, an increase of about 6.9%. In this presentation we are talking about weighted average fully diluted common shares when we use per share numbers. This is the most conservative way of stating earnings per share. For the quarter ended June 30 net investment income was $0.15 per share for the quarter as compared with $0.17 per share for the same quarter a year ago. This was a decrease of about 11.8% on a per share basis. This is reflective in part due to the increase in the weighted average common shares issued in our rights offering which was completed during the quarter.

Now let’s turn to unrealized and realized gains. This is a mixture of appreciation, depreciation, gains and losses on our investments. I’d like to talk about two categories in this section. First is net realized gains and losses meaning gains and losses as this is in cash, and second, net unrealized depreciation meaning unrealized appreciation versus depreciation. As this is non-cash accounting it comes from the change of fair value put on the portfolio.

The realized losses at June 30 we had a net realized loss of about $1.7 million from the sale of nine syndicated loans. As has been mentioned on many of our past calls, we are selling off some of our syndicated loans that have low rates even if it means we have to take a small loss. We then invest the money in higher interest bearing loans.

Regarding unrealized appreciation, for the June quarter ended we had net aggregate unrealized depreciation of $5.8 million over our entire portfolio. This is non-cash and comes from the value put on the portfolio.

During the quarter the company adopted FAS 157 fair value measurements. In part FAS 157 defines fair value, establishes the framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. This new standard provides a consistent definition of fair value that focuses on exit price and the principal or most advantageous market and prioritizes within a measurement of fair value, the use of market based inputs over entity specific inputs. The standard also establishes a three-level hierarchy for fair value measurements based upon a transparency of inputs to the valuation of an asset or liability as of the measurement date.

The company’s adoption of FAS 157 changed the methodology for estimating the fair value for the debt component we have issued to our non-controlled portfolio companies. Previously we valued the debt portion of bundled debt and equity investments in non-controlled companies in accordance with board approved valuation procedures which required that the debt portion generally be valued at the contractual principal balance.

In accordance with the adoption of FAS 157, the Board of Directors determined to change the company’s valuation procedure so that the debt portion of bundled investments in non-controlled companies is valued by Standard & Poor’s.

The impact of adopting FAS 157 was a change in estimated fair value for the debt portion of bundled investments in our non-controlled companies for approximately $11 million of net unrealized appreciation versus the previous methodology which would have been approximately $16.8 million net unrealized depreciation.

And finally, with the adoption of FAS 157 was the net unrealized depreciation in the fair value of certain other debt and equity investments which resulted in an aggregate net unrealized depreciation of $5.8 million as previously noted. Although our aggregate investment portfolio has depreciation, our entire portfolio is fair valued at 94% of cost as of June 30. The unrealized depreciation of our investments has not had any impact on our current ability to pay distributions to stockholders.

Now let’s turn to net increase or decrease in net [inaudible] from operations. This is a term that is a combination of net investment income, unrealized net appreciation or depreciation, and realized gains and losses. For the June quarter this number was a decrease of $4.5 million versus an increase of $8.2 million last year at this time primarily due to the net unrealized depreciation previously mentioned.

This June quarter we are at a negative of about $0.22 per share versus last year at June quarter at a positive of about $0.50 per share. Investors should expect this kind of movement in the value of the portfolio both up and down.

I want to mention another topic known as paid in kind or PIK interest. We do not have any loans with paid in kind income or original issued discount income. We call this kind of income phantom income because the company does not receive the cash but we have to pay out this phantom income as dividend. We avoid phantom income.

Finally, our portfolio companies are paying on time and as agreed except for one proprietary loan and one syndicate loan which as Dave mentioned earlier was sold in the second quarter.

David Gladstone

That was a really good report. I hope each of you listening to this report and get our press releases and also get copies of the quarterly reports, these are called 10Ks and 10Qs, that are on our website and read those. There’s a lot of information in there. We go to a great deal of effort to make sure that we put a lot of information in there so that shareholders have the information they need to make informed decisions.

I do hope all of you heard that Mark noted that the adoption of the new rule 157 that we had to increase the unrealized fair value of our investments for the debt portion of our non-controlled companies. This really means that at least for the quarter ending March 31, 2008 our old method of valuation had been more conservative than the new one that the Board adopted. And we had to adopt that because of the change the way 157 has now interpreted the way that we do valuations.

Our biggest worry today is the debt market place for our funds and the portfolio companies as well that we finance. We’re really worried about the bank’s ability to provide lines of credit to us and also provide lines of credit to our portfolio companies. We are working to bring in some additional lenders to help us with our line of credit. We need to increase our line of credit over time as we grow. And I also worry that our portfolio companies can’t find low-cost bank debt anymore and this will just have a further slowing effect to growth in this lack of funding out there. It is an unsettling time.

We continue to worry about the cost of oil. It’s just having a devastating effect on a lot of retail businesses. It takes money out of the pockets of the middle class. They have less money to spend because gas costs are so high. And many restaurants are having problems, some of them going bankrupt and shutting down. I believe the oil and gas price bubble has burst and that prices will decline for a while. The price is certainly down from the $145 high that it hit and the outlook I think is for lower usage of oil and gas and certainly we strongly are in favor of drilling more for oil in this country and using more coal. We have enough oil and coal to give us really cheap power for the next 100 years and there’s really no reason for us not to start using that.

And at the same time there’s really no reason for us not to favor alternate methods such as solar and nuclear. We’re looking at both of those as things that we can help out with. And there’s no reason not to pull out all the stops. What’s going on right now is we’re transferring so much of our wealth to oil companies that are owned by governments that are hostile to us. Most of the large oil companies in this world are owned by governments around the world that don’t like us, notably Venezuela and others in the Middle East.

We are no longer worried about inflation at least the way the government measures inflation and we’re not likely to see much there. But I would watch out. I think you’re going to see a lot of changes in 2009 and 2010 as inflation takes off. And that’s because of the amount of money being spent on things like the war in Iraq. Our troops are wonderful; we support them every single day; and they’re laying down their life for us so we are very in favor of continuing funding for the war in Iraq as long as our troops are involved. But this war is draining our economy.

And even worse than the war, the war is only a small amount of the spending, is all the pork barrel spending by federal, state and local governments. It seems to me just to be out of control and I think our government officials are acting irresponsibly, and this goes throughout both state, local and our federal government.

Today those governments are spending about 44% of all the spending in the United States. We are really near being a socialistic country in which the government spends more than private industry and individuals. All of this is excess spending; it causes excess taxes, and a great deal of dislocation in the economy. It’s really killed the dollar in terms of other currencies like the euro.

We also see great disparity in the trade deficit with China and some other nations. We just think it’s terrible the way China continues to subsidize their industries to the disadvantage of our businesses. Oil and food is subsidized in China and oil usage just keeps growing there as they continue to subsidize the oil and gas prices there.

We are now seeing the full impact of the downturn in the housing industry and the related mortgage industry. Investors and lenders have lost a lot of money and problems with home loans are creating a very large problem for some of the bank and other lenders. And this hurts us, it hurts our portfolio companies as the banks retract and don’t have money available to finance businesses.

We have to renew our line of credit in October. They’ve told us it’s going to cost more. We’re not really sure what that is. And it’ll certainly be more difficult to put together. We are talking to a lot of different lenders to see if we can find some long-term debt to put on our balance sheet as well rather than just another revolving line of credit. And we’ll let you know how that turns out before the end of this quarter most likely.

In other ways the US economy is continuing to hum along. Entrepreneurs are very savvy people. They’re some of the smartest people in the world and many of these small businesses have kept their costs low and many have profits that are improving. There is a slowdown. We see it in a few of the companies that we see coming to us every day but it’s not reached the stage of showing us that there is a deep recession.

Manufacturing operators are certainly not at full capacity so there’s plenty of room for capacity and I don’t think we’ll make it any time soon either in terms of being at full capacity. There is some slowdown in hiring and backlogs are coming down but this still looks like a slowdown and not a recession, and certainly not the recession we saw in 2001 or 1990.

I am of the opinion and going on record that we’ve reached the bottom of the slowdown. It’s over. We may bump along at this level for a while and then start back up. And it will take like most recessions two or three years, maybe even four, to recover from this but I think we’re starting the recovery now.

Our dividends, our distributions declared by the Board of Directors in July were $0.08 per month for July, August and September. This is a run rate of $0.96 per year. At this distribution rate and with the stock price at $7.92 as it closed yesterday, it makes the yield here just extremely high. We have no plans to cut the dividend. We have a lot of good companies in our portfolio. We’ve had some people that were interested in buying some of them. We’re not in a selling mood. We think it’s just too early to sell any of these businesses. But this means the buyers of the stock today are getting a fabulous return and I think you’ll see continued buying in the stock and I think you’ll see it continue to go up.

Just one note. Please go to the website, sign up for email notification. We don’t send out any junk mail; just news on your company. That’s at I think you’ll enjoy getting the small number of emails that we send out.

Summarizing, as far as we can see in calendar year 2008 and certainly into 2009 everything looks good for this company and good for the businesses that we have in our portfolio. But folks we can only see a couple of quarters out so we want to be careful. As I mentioned before, we are stewards of your money. We will stay the course and continue to be conservative in our investment approach and hope we continue to make a good amount of money for you.

I’ll now open up the call for questions. So Doug please come back on and tell them how to do that.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Jon Arfstrom - RBC Capital Markets.

Jon Arfstrom - RBC Capital Markets

First of all, I always enjoy your comments David. They’re very helpful and frank, and that’s helpful in understanding your frame of mind.

Can you talk a little bit about the pipeline? Dave spoke about it earlier briefly but just curious if you feel like you’re seeing better opportunities in the pipeline? And Dave with your presence there do you feel like growth will accelerate a bit over the next few quarters in terms of your ability to put control investments to work?

David Gladstone

Jon I’ll comment and then turn it over to Dave to comment as well. My view of the pipeline is the same that you’d see in a housing market today. A lot of people have houses for sale but they’re just asking too much for them and the same is true in businesses. They want to get the top dollar so they continue to believe that they’re going to get top dollar like some friend of theirs did or they heard numbers before. But the market place has changed. There’s not enough debt money around to make the hot market that we had a year or year and a half ago, so as a result there are lots of companies for sale but the pricing tends to be relatively high. And Dave Dullum, why don’t you comment on that as well.

David A.R. Dullum

Just to add to that. Basically part of our approach with the pipeline and why we see it increasing right now and so on really has to do with slightly changing our positioning where we are able to offer if you will a product with our I’ll call it mezzanine plus and equity co-invest feature which as Dave mentioned because of the somewhat inability of primarily the equity sponsors having somewhat of a tranch that is not able to be filled by senior or the equity themselves, we feel we can play a role there still being very sensitive however to our overall cost of capital and therefore our return, which is clearly critical to our ability to pay our dividends. So in that regard we do see opportunity going forward.

Jon Arfstrom - RBC Capital Markets

You discussed a little bit about the discussions you’re having with your bank in terms of your debt renewal. Can you talk a little bit about what the discussions are like wit the banks that are not in the facility? Obviously it’s going to be more expensive and you alluded to that, but just generally give us a little bit of maybe qualitative information about how those discussions are going?

David Gladstone

Our existing lead bank is Deutsche Bank. They have told us it’s going to be more expensive this time around. They haven’t told us exactly what t hose numbers look like. We don’t have that coming up until October. We have told them as well that we’re going to talk to a lot of other banks this time around. We didn’t have time back in May but they gave us plenty of time this time, so I guess I’ve probably talked to 10 or 12 different bankers. Three or four of them are very excited to join and have indicated that they will join the credit facility.

So in terms of getting a credit facility, I’m not as worried about getting one but the pricing is still up in the air. It’s too early to say what that numbers’ going to be. We’re hoping it won’t be too expensive. As you know, in Gladstone Capital we ended up at 2.5 over LIBOR. We could certainly stand that. I don’t like it but that would be the number that might come to the fore. I can’t guarantee that until the banks get their heads together and decide what they’re going to offer us. At this point in time again I think we’ll have a nice size credit line. I just don’t know the pricing of it.

Jon Arfstrom - RBC Capital Markets

And just to follow up. Do you feel like the pricing that you’re able to receive on the investment side will be enough in terms of the wider spreads to offset the impact of that?

David Gladstone

That’s right. As you probably know, the senior syndicated loan market place has gone up probably on senior debt by about two points so that’s in the same range that the banks are talking about going up on us. And on subordinated debt and those kinds of things, that has gone up pretty dramatically. We’re seeing that debt move three or four points over where it was before and in some cases even higher than that. So from that perspective we’re okay in terms of spreads but again I don’t want to say that everything’s hunky dory. We still have to wait for the banks to put some pricing together for us.


Our next question comes from Christopher Singley - Singley Capital Management.

Christopher Singley - Singley Capital Management

I was just struck by the effect that the additional capital you raised had on dropping the amount of the net investment income per share, and I was wondering if you could comment on the effect given that you say that the pipeline still looks a little bit slow because the pricing isn’t budging and also you don’t feel that it’s time to exit any investments yet? What are the prospects for being able to cover the [inaudible] investment income over the course of this year?

David Gladstone

Two impacts there. First of all, you’re right. The raising of additional shares did put a downward affect on that and we want to get that money to work and make sure that it’s okay. But the other part of it is that on the senior syndicated loans that we have in the portfolio, now about $138 million of cost, those don’t have any floors on them. So when LIBOR went down we took a bath in terms of the return there and that put a downturn on the returns as well. So over time we will sell those off.

We’ll probably have to take some losses on them but if you just use an example, and I’ll use a crude example rather than one that is in actual portfolio, if you had a million dollar senior syndicated loan and it was paying out at 5.5% because LIBOR has gone down so much, you’re making $55,000 a year in income on that. If you sell it at $0.90 on the dollar and get $900,000 and put that to work at 10%, you’re now making $90,000.

So over the next six months we will be selling down our senior syndicated loan and putting it to work. Right now the rates are much higher than 10%. We’re averaging certainly better than that on our debt in the 12% to 15% range. But assuming for the sake of argument a flat number of 10%, you can see that would have a nice impact on our return. In addition we’re not highly leveraged on our line of credit and assuming the bankers come through for us and give us a nice line of credit, we can use that to leverage up. If you’re borrowing at 2.5 over LIBOR and lending out at 900 basis points or 9% over LIBOR, there should be a nice return as well.

And that’s the way that this company will fix itself before the end of March 31, 2009 which is its fiscal year end.

Christopher Singley - Singley Capital Management

I see. So in the market place for these middle market buyouts you’re still seeing encouraging signs for putting the capital to work?

David Gladstone

Encouraging signs and let me just go back on that because when we decided to raise the money in April and May, the market place looked like it had turned to us. In fact we were all smiling here thinking that the world had changed and that the bottom had been reached. Of course if you go back and look at June and July, it was a disastrous period in which we continued to slide down in the economy and obviously the stock market reacted the same way.

We’re now seeing a building again of that base and that’s why I said I think we’ve turned the corner and that it’s time for us to start putting money out. But that downturn in June and July set us to thinking that perhaps we shouldn’t put money out until we know we’re at the bottom, and I think we believe we’re all there now and we should be able to put some money out.

And again it’s a little more difficult because of two things. First of all, the banks aren’t lending and second of all, people haven’t cut the price on the companies they’re selling. There are about 200,000 small businesses that get sold every year so that’s one part of our market place. There are millions of small businesses that get growth capital and borrowing bases and those kinds of things during the year. That’s also part of our area.

So this is a highly fragmented market place that we cover pretty extensively and we believe that we will find enough deals during the next nine months to make our year-end March 31, 2009 a really strong year.


Our next question comes from Jeff Rudner - UBS.

Jeff Rudner - UBS

Looks like a good quarter under difficult conditions, so congratulations to you and the entire management team.

A couple of questions and partly following up on the previous questioner’s comments. I know the annual meeting is at 11:00 today at which time you will announce the results of the proxy vote, particularly the ability of the company to be able to issue stock below book value. Are you able to share the results of the proxy vote with us now?

David Gladstone

No, of course not. But it’s going to be just fine.

Jeff Rudner - UBS

So I assume that’ll be announced later today what the results are?

David Gladstone

It will.

Jeff Rudner - UBS

Second question. I know that the net asset value dropped by $1.70 a share from the March 31 year-end quarter to the current quarter from $12.47 to $10.77. How much of that was attributable to the rights offering?

David Gladstone

It was a big slice. Mark, do you have that?

Mark Perrigo

About $1.25 so a big chunk of it.

Jeff Rudner - UBS

Obviously we’re in a difficult environment. I appreciate the fact that you mentioned earlier that you don’t anticipate a reduction of any sort in the $0.08 monthly dividend. The obvious other side of the coin would be, do you anticipate as you invest money your ability to lift a dividend say six or12 months down the road?

David Gladstone

I’m hopeful. I just don’t want to commit to that because the number of investments you can get done in any quarter is always lumpy, so until we put the loans on the books obviously we can’t do that. And with the loans that we have on the books we’re probably okay over time. Certainly if inflation starts to go and the interest rates go back up, we’ll have a lot more money available just for the fact that LIBOR going up would help us a lot.

Jeff Rudner - UBS

You mentioned earlier in your comments that a number of loans were based on LIBOR and as LIBOR went down obviously the income went down as well. And if you were to sell them off say by the end of the current fiscal year at $0.90 on the dollar and reinvest the money at a say 9% or 10% rate of return, would that impact upon the ability to raise the dividend by the end of the year?

David Gladstone

Yes, it would.


Our next question comes from [Lee Carter] - Private Investor.

[Lee Carter] - Private Investor

What’s the advantage to a stockholder for you to be able to sell stock under book value versus buying stock under book value?

David Gladstone

Two points here. First of all, I don’t think our bankers would be very happy if we were buying back shares; using our line of credit to buy back shares. In fact I know they wouldn’t. They’d be very upset because we’d be reducing the equity and using their debt to do it. So we are really precluded from doing that based on using our line of credit.

The second side of it is the only time we’re going to use that provision should the shareholders approve it today at 11:00 is when we absolutely have to because we’ve grown the asset base to a point and can’t grow it any more. If we’re growing the asset base, that is if we’re selling shares and use today’s number at that price, it would be very dilutive but at the same time if we were putting the money to work - and you have to remember Lee that this money goes to work and it may only yield 10% or 12% on a current basis but we’re expecting the all-in return to be 20% to 30% on these buyouts and we’ve pretty much convinced ourselves that some of these deals are going to be big winners.

I’m hopeful that in the next month or so we can announce one transaction, not that we’re selling it but that a new group is coming in to invest in the company and will put a nice strong valuation on it. And others are coming along well.

So the real question is if you’re a short-term investor, it’s probably not advantageous at all. If you’re a long-term investor and going to stay with it, then you’d want us to sell shares and invest it because the opportunity is now. And we always go through this when opportunities are slim, money usually is plentiful and then it turns the other way and money’s not plentiful but opportunities are great. And that’s the point that we’re at right now if this is the bottom of the recession.

[Lee Carter] - Private Investor

I think you mentioned yesterday this is the time for you that you’ve been waiting for and looking for actually.

David Gladstone

Lee, I don’t want to wish bad things on the economy and people and everything, but we’ve been praying for this for a long time. And it’s finally here. We would have had a good go in capital in 2001 except it was all related to 9/11 and was such an unusual recession that we were afraid of stepping out. This time we’re not. We’re just waiting for the bottom and then we’re going to turn on the jets.

[Lee Carter] - Private Investor

David, one last question. In your opinion, how many shares are short?

David Gladstone

It’s a bunch. I don’t know exactly, and the way the shorts do it now it’s very hard to tell. NASDAQ has a list of what their guess is and it’s a bunch. If you’re a hedge fund with $6 billion under management and you come up against our little company, you can damage it very nicely. All three of our companies have been damaged by the short sellers.

[Lee Carter] - Private Investor

That’s what I thought. They protect the big guys, the SEC, but they don’t protect the little SOX. You can’t stand against them.

David Gladstone

Well we’ve asked the SEC to include us in the 17. We’d like it to go up to 18 and 19 and 20 and include us. We haven’t heard back from them. We also asked the Fed if they would lend us cheap money like they’re lending all the others and unfortunately they said we don’t qualify. So you’re right. They do protect the big guys with both money and sheltering their stock from short sellers but the rest of us are left out in the wind to fly.

[Lee Carter] - Private Investor

I remember your statement a long time ago. You said, you just keep doing your thing, keep paying the dividends, and they finally go away.

David Gladstone

The short guys do have to handle the dividend. As you know, when they’re short they have to cover the dividend. And since we’re not going to cut it that means they can stand there and keep paying their shareholder that they borrow the shares from a monthly dividend.

[Lee Carter] - Private Investor

What was said here today is there’s some indication that there’s going to be some major changes in your investment portfolio versus the syndicated loans.

David Gladstone

Yes. We’re out of syndicated loans in this company. Even though the syndicated loans have turned very nicely in terms of the returns they give the folks, it’s just not enough for us given the cost of our debt and our equity for us to play in that market place. So the ball’s in the court of the buyout people and we participate with buyout funds many times as well as we do our own, so you should see a good uptick over the next six months.


There are no other questions in the queue at this time.

David Gladstone

We thank you all for attending and that’s the end of the meeting.

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