Gladstone Capital Corporation Q4 2009 Earnings Call Transcript

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Gladstone Capital Corporation (NASDAQ:GLAD) Q4 2009 Earnings Call November 24, 2009 8:30 AM ET


David Gladstone - Chairman

Chip Stelljes - President and CIO

Gresford Gray - CFO


Vernon Plack - BB&T Capital Markets

Greg Mason - Stifel Nicolaus

David West - Davenport Company

Scott Valentin - FBR Capital Markets


Greetings and welcome to the Gladstone Capital Fourth Quarter 2009 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Gladstone. Thank you, Mr. Gladstone. You may begin.

David Gladstone

This is David Gladstone, I am the Chairman and this is our quarterly conference call for all the shareholders as well as analyst of Gladstone Capital. We are traded on NASDAQ under the symbol, GLAD, and again thank you all for calling in. We’re always happy to talk with shareholders about our company.

I wish we had more often, more call like this, but unfortunately it’s just once a quarter. I do hope you’ll take the opportunity to visit our website at where you can find a lot of information about us. You can also signup for e-mail notices, and you will get notifications when we have information that’s coming out about the company in a timely fashion I think.

Please remember that, you have an open invitation that if you are ever in the Washington D.C., area. Please stop by and see us here in McLean, Virginia, we are just a short drive from downtown. Come by and say hello, you will see some of the finest people in the business, and you are always welcome to stop by and see where the people are that are managing your money.

I need to read a statement of our forward-looking statements now. 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 the statements with regard to the future performance of the company.

These forward-looking statements inherently involve certain risk 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 the forward-looking statements including those factors listed under the caption “Risk Factors” in our 10-K and 10-Q filings that are in our prospectus and also filed with the Securities and Exchange Commission.

Those can also be found on our website at, and of course they are on the SEC website at The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a results of new information, future events or otherwise.

Well we always start with our President, and our President of course is Chip Stelljes. Chip is the Chief Investment Officer for all the Gladstone companies, and he's the President of this one and he’ll cover a lot of ground. So, Chip, why don’t you start off please?

Chip Stelljes

As most of you know, we continue to operate in a difficult economic environment. Through the quarter ended 9/30/2009 that environment did not improve materially. While some new investments are being made in the market, the continued instability of the financial and lending markets combined with continued downturn in the economy and the lack of real visibility heading into 2010 has just made us cautious.

But we did not close any new investments during the quarter just ended, and the investment activity of $1.7 million was entirely in existing portfolio companies in the form of additional investments or draws on revolver facilities.

During the quarter, we received net payments of approximately $11.3 million, due to loan sales, payoffs, normal amortization and pay-downs of revolvers. This resulted in a net production decrease in our portfolio of $9.6 million for the quarter.

Since the end of the quarter, we made about $1.6 million in additional investments in existing portfolio companies. Additionally, after the end of the quarter, we sold two syndicated loan that were held in our portfolio of investments at September 30. These syndicated loans have aggregate fair value of $2.7 million of which we have received all proceeds.

As we continue to seek new investment opportunities with pricing [instructions], structures that are attractive. Unfortunately, companies that have a positive outlook into the 2010 are limited, but we are seeing some, if we can access to more capital, we believe that we can make investments with a cheaper and attractive rates of returns in this environment.

As I mentioned, the net decrease in investment assets for the quarter just ended was $9.6 million from loan sales, prepayment and repayments. We used this money to pay down our line of credit, which allows us to further deleverage. We continue to explore ways to increase the yield on our existing investment portfolio by refinancing our lower yielding senior loans with third-party lenders, while trying to maintain the higher yielding junior debt.

At the end of the September quarter, our investment portfolio was valued at approximately $321 million, versus a cost basis of $364 million; so approximately 88% of cost. Although the values remained stable this quarter, we still believe that the valuations are more reflective of the overall poor market for loans, rather than the performance of our specific portfolio. That being said, we continue to closely monitor our portfolio of companies’ revenues and backlogs to judge where we are thinking underlying companies are headed.

At the end of the quarter, we had loans with five companies on non-accrual, and a number of companies experiencing problems that may prevent them from making timely payments in the future. We’ve taken operating control of several of these companies and are working hard to fix the problems and improve profitability.

On a dollar basis, the loans classified as non-accruing have a cost basis of $10 million or about 2.8% of the cost basis of all loans in our portfolio. Our portfolio of companies are not immune to the current economic climate, and therefore we may have some additional non-performing loans and some write-offs, but we need you to know that we are working hard to keep them to a minimum.

We continue to have a high concentration of variable rate loans, so that we participate when rates begin to increase. And while our rates are variable, they often have a minimum interest rate per floor, so that declining interest rates are somewhat mitigated.

Approximately 83% of our loans have floors, 2% have floors and ceilings. However 11% of our loans do not have floors at all, and with short-term floating rates at all time lows, we generate less income. The fixed short-term rates are too [low]. The remaining 4% of our loan have fixed rates.

Another measure of the quality of our assets is that our average loan rating for the quarter just ended remains relatively unchanged. Our risk rating system tends to measure the probabilities [evolved] through the portfolio by using zero to 10 scale. Zero represents a high probability of default and 10 represents a low probability.

Our risk rating system for our non-syndicated loans showed an average rating of 7.1 for this quarter and 7.3 for the same quarter for the year prior. The average risk rating for unrated syndicated loans was 7.0 for this quarter versus an average of 6.6 for the prior year's quarter. As for our rated syndicated loans, they had an average rating in CCC plus or CAA1 for this quarter and the prior year quarter.

Overall, the risk profile has remained relatively constant according to our risk rating model. While the risk rating is showing only slight changes in the portfolio, we do see changes that may not be picked up by our risk rating system, and our companies are not immune to the current poor economic conditions and we want to avoid relying solely on a single risk rating system as so many investors did with the rating [agencies] prior to the economic downturn.

In addition to the quality of assets, the quality of our income continues to be good. As we've discussed before, we do not intend to generate income from paid in time or original issue discount structures. These generates non-cash income which has to be accrued for book and tax, but is not received until much later as we know, sometimes not at all. This income is subject to our 90% payout requirement, so the company does not receive the cash, but has to pay out the income, so we [avoid those].

From inception through 9/30/2009, we've made loans to 126 companies totaling greater than $952 million. Our cumulative net loss has been approximately 3% of total investment since inception. We've been repaid or exited from 78 companies. As of 9/30/2009 the average return of the exits has been about 8% for syndicated loans and 12% for non-syndicated loans.

Historical returns have dropped some as we booked the loan sales that we've announced. As we reported last quarter, we had sales from high performing loans to pay down our full [term loan] of credit.

With (inaudible) effective means debt market [place] for a larger middle market companies has been improving recently. At September 30th we had a cost basis of approximately $14 million senior and second lien syndicated loans. This is where we had most of our variable rate loans without floors and these loans have seen a value decline more than the others.

As I states earlier, we sold a number of these syndicated loans during this quarter. The market pricing for the large and middle market loans continues to change for senior syndicated loans of $200 million or greater. Rates prior to the credit crunch were approximately 2.5% over LIBOR. LIBOR is of course the London Interbank Offering Rate which is recognized as the leading indicator of short-term corporate rates.

Data spreads seem to be closer to 6% or more over LIBOR. Because these new loans are at higher spreads, the old loans are coming in to lower market price. In light of this market, without regard to any changes in prices we had intended to hold our syndicated loans until they mature, because we believe ultimately that we will recover our capital if we did not sell them, but we did chose to sell them, some of them, a number of them at a discount in order to reduce our outstanding indebtedness under the line of credit. Of the remaining syndicated loans all are paying as agreed.

In addition to widening spreads over LIBOR, the norm for LIBOR has traditionally been about 5% to 6% and was approximately three-tenths of 1% at September 30, 2009. LIBOR is artificially low, given the emphasis on lowering rates worldwide to spur lending as normally low LIBOR has depressed our income.

The small loan market in which we invest most of our capital is not seeing much competition. Banks have tightened up their credit standards. Probably most banks are only willing to make purely asset-based loans. We normally compete with other BDCs, private lenders, such as mezzanine loan funds, a few hedge funds, and some of the small business investment companies out there.

Again, our loan request pipeline is still good and we can access capital and get comfortable with the risk in economic cycle and then materialize into more new investments as we enter our 2010 fiscal year. Our goal was always to be a strong profitable company [riding] against the biggest company.

With that, I’ll turn it back over to David.

David Gladstone

That was a good report; you have a good understanding of what's going on in the last quarter. Now let’s turn over to the financials and hear from our Chief Financial Officer, Gresford Gray. Gresford?

Gresford Gray

We’ll begin with our balance sheet, which continues to remain strong. At the end of the September quarter, we had approximately $336 million in assets, consisting of $321 million in investments at fair value and $15 million in cash and other assets.

We borrowed about $83 million on the line of credit and had about $249 million in net assets. As such, we’re less than one-to-one leverage. This is a very conservative balance sheet for finance companies, which are usually leveraged much higher. We believe our overall risk profile is low.

In May 2009, we entered into a new credit agreement, a $127 million revolving line of credit with Key Equipment Finance, a part of KeyBanc, which replaced Deutsche Bank as the administrative agency. BB&T Bank also joined the credit facility as a committed lender. The new facility matures on May 14, 2010.

Subsequent to September 30, we reduced the size of our credit facility by $20 million, from $127 million to $107 million. We are in good standing with our line of credits from KeyBanc and BB&T. We're required to review KeyBanc's participation [NOI] from $100 million to $75 million by December 31, 2009, and as of today, we have reduced them to $80 million and have the ability to reduce them the additional $5 million today.

Turning to our income statement, for the September quarter, net investment income was about $4.2 million versus $6.1 million for the same quarter last year, a decrease of about 31%. The decrease was primarily due to a decline in investment income, resulting from the exit of loans during the quarter, lower transaction fees paid by the portfolio companies which are credited against our base management fees, and professional fees incurred in connection with troubled loans.

Please note that LIBOR has fallen and remained low, which has negatively impacted the earnings from our syndicated loans. But because we have sold many of our syndicated loans even if rates go back up, you don’t expect that our income will increase [shortly].

On a per share basis, net investment income for the quarter was at $0.20 per share, as compared to $0.29 for the same quarter last year. This was a per share decrease of about 31%, which again was caused by the changes in our balance sheet.

As many of you maybe aware, net investment income is the most important number to us because it’s the number that is closest to our taxable income, which is the income we use to pay our dividend.

Now, let’s turn to unrealized and realized gains and losses, which is a mixture of appreciation and depreciation, gains and losses. I will speak about two categories in this section. First I will speak about gains and losses, because they are cash items, and second, appreciation and depreciation which are non-cash items.

For the September quarter, we had a realized loss of about $12.1 million, primarily due to the write-off of one loan and the sales of syndicated loan. For the quarter, we had net unrealized appreciation of about $11.6 million. This represents a net change in the fair value of our investment portfolio; including the reversal of previously recorded unrealized appreciation or depreciation when gains and losses are realized.

During the quarter, the unrealized appreciation included $9.4 million in previously unrealized depreciation from the loan that was written off. As such the $12.1 million realized loss we incurred this quarter has (inaudible) but partially offset by the reversal of the previously unrealized depreciation resulting in a net $2.7 million loss for the September quarter.

As of September 30th, our entire portfolio of share value is at 88% of our cost basis. The cumulative unrealized appreciation of our investments does not have an impact on our current ability to pay distribution to stockholders. However it may be an indication of future realized losses, which could ultimately reduce our income available for distribution.

As explained in our recent SEC filing, when market demonstrate characteristics of illiquidity, we are required to value our syndicated loans using the discounted cash flow [method]. However in monitoring the market activity during the quarter ended September 30th, we know that changing market conditions are indicating our returns to liquidity and a better function in secondary market with syndicated loans.

As such we used third party bid quotes to value our syndicated loans as of September 30th. However for the loans we sold after the quarter end, we used the sales prices rather than the third party bid quote.

During the September quarter, we had another component of unrealized appreciation which related to our credit facility. As mentioned in our previous 10-Q filing of the June quarter, we adopted the fair value option specifically for the credit facility. At that time, the credit facility was fair valued and it’s approximate cost basis.

However for the September quarter, we recorded an unrealized depreciation of $350,000 based on estimate of value provided by an independent third party. Such valuation reduced our net asset value by $350,000.

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

For the September quarter, we had a net increase in net assets resulting from operations of $3.4 million versus a net decrease of $14.1 million for the prior year quarter. This is a positive $0.16 per share for the current quarter versus a negative $0.67 per share for the prior year quarter. With the continued uncertainty in the current economy and credit markets, investors should expect continued volatility in the aggregate value of the portfolio.

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

David Gladstone

I hope all of our listeners out there will read our press release and also obtain a copy of the quarterly report called the 10-Q and 10-K. We filed the 10-K yesterday with the SEC. You can access the press release and the 10-Ks and 10-Qs on our website at and also see on the SEC website.

I think the big news for this quarter was, we continued to make progress with our portfolio of investments and our desire to pay down our short-term line of credit with KeyBanc and BB&T. As many of you know that they replaced our primary lender, Deutsche Bank.

As part of the new agreement, we have or promised to reduce the commitment of KeyBanc to $75 million by December 31, 2009, and after the quarter ended as Gresford reported, we reduced KeyBanc to $80 million, and we are in the process of reducing them to $75 million, probably this week, and now we are in the process of working on it now.

So, our line of credit will be at a $102 million soon and there is plenty of room for our company, especially short-term line of credit. We are happy with our new lenders and have moved away, we’re very happy to have moved away now from Deutsche Bank which placed us in a very difficult position, when Deutsche Bank decided not to renew our line of credit. They did this to a number of other people in our industry and other industry. So, it’s not just us that we are damaged; they damaged a lot of other companies as well.

Our biggest challenge today is the debt marketplace for companies like ours as well as for our portfolio companies that we finance. So, we have a line of credit with very supported lending and that’s [sufficient] today and that’s working very fine, and it’s really sufficient for the near-term.

By the way we are having discussion with our lenders now about our renewal of the line of credit, stay tune for that, we’ll let you know when we have finally negotiated those terms and condition. However, just need to remind you that we need to raise long-term debt and have long-term capital such as the issuance of preferred or common stock in order to finance new investment.

Our new investments, as you all know, are long-term, so we need long-term liabilities to go along with that. We can’t rely on a short-term line of credit for making long-term investments. For our portfolio companies, we worry too that they will not have the ability to get either line of credit or long-term loans that they need.

There are a fair number of regional banks that are making new loans based on primarily on the assets of the business. These asset based lenders are more clinical than they were last year of course, and we hope to get banks to finance all of the lines of credit for our portfolio of companies and get out of the business of providing lines of credits to our small businesses that we work with, but we just have to see how that works out over the next year.

We continue to worry about the price of oil; it's a terrible risk to our economy. Oil prices are probably going to continue to go up as the economy improves; at least that's where we see things going. We're currently worried about inflation now. The decision by lawmakers in Washington to expand the money supply will probably cause much more inflation to return.

The government’s projecting to issue about $2 trillion worth of government borrowings such as key bills that will fuel inflation as well, and we wonder about all the spending that the federal government is doing now is just off the chart. So look at the so called stimulus package and it’s filled with spending goodies for many of the supporters over the legislators and the healthcare bill that's coming down the pipe seems to reward a lot of supporters of legislators as well.

These stimulus packages as they call them and the healthcare bill are really dislocating a lot of the markets out there, and we have to worry about that when we're investing and worry about it for our portfolio companies. I'm really not sure how this will turn out, it looks like that the government is partially nationalizing a lot of banks, insurance companies and the auto business as well as the healthcare area, and this can't be good for the long-term success that our country, as we know, governments are very inefficient and many decisions are made on politics rather than business decisions.

The amount of money that's being spent of the war on Iraq and Afghanistan is certainly hurting our economy. We are certainly supportive of our troops; they are the heroes of this period history. They risk their lives for us every single day, and we pray for their safe return back to the homeland.

The costs are horrendous, and as all of you know, all of that spending is off-budget. They don't have that in the budget. So that's over and above what they are spending in the budget, each time you hear those budget numbers.

All of this spending means one thing and you know what it is that taxes are going to have to increase and I just do not see how people can handle more taxes. It's going to cause even more dislocation and the government will have to sell more debt. That will cause more inflation, and many in the Congress today, legislators are calling for increase in taxes on what they call the so-called wealthy, but their definition of wealthy includes most of the middle class, even down to as low as $40,000 a year in earnings. So, we can bet that taxes will be increasing over the coming years.

Our worry about the trade deficit with China and certain other nations is just terrible right now. China continues to subsidize their industries to the disadvantage of our businesses. For example, they've subsidized their oil prices significantly. Oil prices, the business is there about half of what it cost the government to buy oil on the open market, and this of course means that our companies here in the United States can't compete with those businesses, and that leaves jobs just leaving the United States and going to Asia. It's a sad state of affairs.

The downturn in the housing industry and the related disaster in the home mortgage defaults continues to hurt our economy. I'm not sure anyone knows how many home mortgages are going to ultimately fail. There’s been estimate as high as $1 trillion. Right now, I read this morning that one in four homes that people own today are under water in terms of the mortgage that they have on the houses is higher than the value of the real estate.

Real estate defaults are the main cause of this recession that we have today, it ticked it all of. However the housing problem by estimates will likely turnaround in 2010, because housing prices have fallen so much and mortgage rates have come down so much, they are also being subsidized and of course there is a tax credit if you are a first time buyer. So all of that’s probably going to bring back some qualified buyers into the housing industry in 2010. So, we’re hopeful that that will turnaround.

In spite of all of these negatives and there are a lot of negatives, but I want to say some positives here. The industrial base that the US is not a disaster, it’s not going over the edge, it continues to struggle along. The recession is having an impact on all businesses including our portfolio companies. But again it’s not a disastrous one. Unlike most companies, our portfolio of companies has not seen big increases or any increases at all in revenue or backlog.

Some of them have seen their revenues decline, but most have cut their cost as best they can in order to keep their profits up. But revenues haven’t increased, and until we see revenues increasing you probably aren’t going to see the economy turnaround, and perhaps that will be next quarter or the quarter after, but we’re hopeful that 2010 will be a good strong year.

They only think that’s hurting us is the lack of bank lending money and it’s been mentioned before. We need long-term debt not short-term debt. We have plenty of short-term debt, and I am sure that our portfolio of companies over 2010 will be able to get their short-term debt.

However, most banks have just stopped making long-term loans. This is like the 1990 recession, except in this case the federal government is pouring money into the banking system and they’re pouring in short-term money into the banking system rather than as they did in 1990. They took over the bad banks and sold off the asset. So, we will have to see how this strategy, this niche strategy by our government is going to work out in the financial system.

I believe that the downturn that began in 2008 will continue well into 2010. I don’t see any let up; I'm hopeful that it continues at a slow pace that we are going out now. However I do think the economy is going to stabilize in 2010 and if that’s true, we can take advantage of it. This will be a great time for us over the next two to four years as this is the stabilizing, but we’re all awaiting to make sure that the economy has stabilized before we jump out and stat making new loans and investments.

Our plans today are to seek some long-term debt for our fund. We need to borrow long-term, because we invest long-term. We’re making the rounds with some of the long-term lenders such as insurance companies to see if we can raise some long-term debt. This will take us while to get that in place, and we haven’t yet applied to the SBA for an SBIC licenses and if the SBA grants the license, we’ll be able to borrow up to $120 million on very attractive terms.

By the way, under that program, we can borrow money through the SBA for 10 years and interest only for 10 years at a rate that’s only a few percentage points above long-term treasuries. So 10 year treasuries plus the small amount would be the rate that we could borrow at.

So it would be very advantageous if the government will let us have an SBIC license, but we still don’t know if we'll receive it. We thought we are in line and we’re hopeful that they will get through us soon and issues us the license.

We’re also looking at issuing some preferred stock or something similar to preferred stock, but today it would be very expensive if we do find a way to issue preferred stock or something like that in a good price range, then we’ll certainly consider it and that would help us to generate long-term capital that we could use to make investments and we had looked at some convertible preferred stock and that may work for us as well, as we continue to look at that.

We are considering issuing common stock, but certainly not at this time. Its price is just way too low and that may change as time goes on, and so we can raise some money either with preferred or common or long-term debt that will get back into the lending business.

As you all know, the distribution is $0.07 a month. For October, November and December we will declare the next dividend in January. In our projections when we set up the $0.07, we didn’t assume that we'd make any new investments. So if we do start making new investments, it will help our projections and we can exceed them and hopefully continue to grow the business, but obviously there is no guarantee on that today we’re just going to do the best we can.

At the distribution rate that we have in October, you're talking about $0.07 a share. At $8 as the stock closed yesterday, the yield on the stock is now about 10.5% at the very high income rate considering the company is strong as it is and continues to go forward at a good pace.

Now let me ask you all, please go to the website at and sign up for our e-mail notification, so we won’t send out junk mail, which is good news on the company. Remember in summary here that, as far as we can see the economic conditions look like they will change; that we’ll get to bottom during 2010; that we’ll start to gain some strength in this company.

We just don’t know when that's going to happen, and the next two quarters will be very telling. As we watch the quarter that ends in March, we'll have to make some judgments as to whether we've reached bottom or not. As you know we are stewards of your money, we're going to stay the course and continue to be conservative in our investment approach and continue to have a good portfolio and continue to have a good portfolio.

Well operator, why don’t you come on now and let’s open up the lines to some of the analyst and our shareholders who want to have some questions.

Question-and-Answer Session


[Operator Instructions]. Our first question is from the line of Vernon Plack with BB&T Capital Markets. Please go ahead with your question, sir.

Vernon Plack - BB&T Capital Markets

Dave I am trying to understand, the interest income line this quarter, and if you look at what the number was with $9.2 million versus $10.6 million in the June quarter, which is a 13% decline. I’m trying to fully account for this difference. I know the portfolio shrunk a little bit about 6% and you also had some additional non-accruals. If that doesn’t account for all the difference, may be there are some timing difference or something else going on there.

David Gladstone

Gresford why not you answer that one please.

Gresford Gray

Vernon the September interest income number also included the reversal of interest income related to the loan that was written off or a bit dangled during the quarter.

Vernon Plack - BB&T Capital Markets

Do you know how much that was?

Gresford Gray

(inaudible), but I will be happy to follow-up with you and get that.

David Gladstone

We’ll put that on the questionnaires and answers in our website, if you don’t mind Vernon. All right we have another question please.


Yes, we do have. A question is coming from the line of Greg Mason with Stifel Nicolaus. Please go ahead with your question, sir.

Greg Mason - Stifel Nicolaus

Could you talk about the average LIBOR for in your portfolio for those investments that you have a floor?

David Gladstone

Gresford you know the --.

Gresford Gray

It’s between three and four.

David Gladstone

It’s between three and four is the floor.

Greg Mason - Stifel Nicolaus

Could you talk a little bit more about the SBIC opportunity and where you are in the process? Have you officially filed you application yet and waiting to hear back?

David Gladstone

Chip you want to answer that please?

Chip Stelljes

Yes the application being filed. We were asked for some additional information. We've now delivered to them. We either have or are about to receive our comment letter on our application. This is will [broad] the legal documentation list as they requires, and so we are likely in the process, and it’s just a question of how quickly they will get to us and make a decision.

Greg Mason - Stifel Nicolaus

Do you have any kind of timeline that you guys are thinking or hoping about that you are willing to share on the completion of that license?

David Gladstone

We've made so many estimates on that I am almost afraid to do it. SBA is working I'm sure as hard as they can. We had a gentleman over here about a week or so ago (inaudible) where she came over for again to ask questions and get more information and we've provided that.

So we're hopeful that this final letter will come the final questions and that will move quickly through the process, but we have no control over that whatsoever. My guess is we're probably two months away, but that's again a really rough guess.

Greg Mason - Stifel Nicolaus

One last question, are you able to get separate licenses for GAIN, GLAD and GOOD or do they view your entity as the term one whole for the license process?

David Gladstone

No, we can have a license in both GLAD and GAIN. What we won't do is get one for our real estate company. SBIC are precluded from doing those kind of transactions, so it would be inappropriate for us to ply through Gladstone Commercial. But our hope is to get the license for Gladstone Capital, this company soon, and make a success of that so that SBA would like us to get the license for GAIN as well.


[Operator Instructions]. Our next question gentlemen, is from the line of David West with Davenport Company.

David West - Davenport Company

In the fourth quarter, it looked like your professional expenses were in excess of $800,000, materially higher than had been in prior quarters. Any particular activity drive that figure?

David Gladstone

Chip is going to answer that one.

Chip Stelljes

We had significant professional fees. The tough part of the [normal] recurring professional fees that we get at year end in the company. We had significant ones related to portfolio company issues. The primary one was the bankruptcy and write-off of the banker had significant legal expenses associated with that Chapter 11 filings. Those are other things that perhaps (inaudible), those are behind us now, and we should not see those going forward. An unfortunate result from that particular testament all around.

David West - Davenport Company

I guess just a more subjective question. Obviously there were somewhat non-reoccurring unusual items that depressed the top line this particular quarter. But do you think you are getting close at some point to starting to make new loans at this point in the cycle?

David Gladstone

I do. I think the process that we've been going through is to make sure that our short term line of credit was in place and paid down to the amounts that they wanted us to have it at. As you know, the existing line needs to be reduced by May to $50 million for KeyBanc.

But they are now in here telling us that they would like to talk about renegotiating our line of credit. So, we don’t know where that’s gone, but I think it would be view to have a positive that they come back and or starting to talk with us again. But it’s just too early in the process of discussing that to -- to make any projection without where that will go.

I am hopeful that during this quarter, we can find some long-term debt from some two or three institutions and raise $25 million to $50 million of long-term debt; that would help us a lot as well. Okay. Do we have any other question?


Yes, really sir. Our next question is from the line of Scott Valentin with FBR Capital Markets. Please go ahead with your question, sir.

Scott Valentin - FBR Capital Markets

Regarding the investment I think you just might have answered part of the question in the last response, but we’re trying to get a sense of when you would resume making loans. I know you are making portfolio investments, but is it more, are the returns are adequate today or is it just you mention all that’s going on with credit situations right now. Maybe more of an asset liability duration matching issue?

David Gladstone

Well certainly the latter, we don’t want to make long-term investments with short-term debt, and that is what probably destroyed a lot of people in the industry and it certainly was one of our downfall for using the very large line of credit with some one that we thought was going to roll over the line of credit because they’ve given us many promises along those lines.

So, we are not going to go down that road again of having a large short-term line of credit and using it to make long-term investments. So, that’s certainly on our mind and that’s why I’ve mentioned so many times that we need to raise long-term debt before we can get into the marketplace of making new investments. But second of all, the marketplace is still very uncertain.

We’ve looked at any number of transactions and decided against them or just pass because we thought the economy was not strong enough, and there are a number of economist that keep saying to us that there is going to be a second write down and to be careful. So we are being careful.

So I think its both ways, however Scott if at this point in time, we were able to raise a reasonably priced long-term debt or equity, we could probably fund any number of transactions that would be satisfactory to us and let us do it. But I think right now we are hampered by both of those, due to the uncertainty in the market places as well as the lack of capital in the marketplace.

Scott Valentin - FBR Capital Markets

But in terms of the pricing of assets and competition you feel comfortable making (inaudible)?

David Gladstone

The pricing has all moved back up. If you look even at the marketplace that you can view, the senior syndicated loan market place, you are watching transactions, they are priced out at in the positions that we would be taking in 10% and 12% current pay.

We think that we can get those kinds of rates quite easily, with equity options as well. So the market place is back where it should have been all along, because that's where the risk reward we are taking to in terms of pricing deals.

The pricing in the market place is not the problem anymore, as it was two years ago. Pricing was a problem, you could find plenty of deals, but the pricing was still behind that, you didn’t feel like the risk reward ratio was there.

Today pricing is not the problem; the real question is what's the risk associated with that transaction today, given this current economic downturn. So, we’ve got to raise long-term capital first to make long-term investments. We might raise it from having an SBIC if we get an announcement that we're going to have an SBIC that would be a very positive news about doing new investments.

But I want to warn you that we're going to be very tricky in this marketplace unless we see open running room and things clearing out, so that we can make long term investments without feeling like we might get another downturn in the economy next week or next month. Next question, please.


Hi, the next question is from Greg Mason with Stifel Nicolaus.

Greg Mason - Stifel Nicolaus

One additional follow-up; if I understand correctly, just trying to get my hands around the SBIC opportunity. I think the new rules in the SBA is that you have to fund your equity portion before you can draw the debt, is that correct and how much then of your own capital do you have to put up to get that debt?

David Gladstone

Yes. You do it in stages, you can put up some of our equity and then draw down money and then put up more equity and draw down money. It’s a process that you go through. You don’t have to put up every single dollar before you can draw your first loan.

There are obviously some very small SBICs that are never going to hit the limit that you can get from SBA. There might be $15 million in equity and all and draw down $30 million from SBA. So you can incrementally go along in that process.

Greg Mason - Stifel Nicolaus

So you don’t have to start off by stating if you want to go for the 450, you can ratchet it up as you get equity?

David Gladstone

That's right. You could have a small SBIC. They are not requiring you to have a large SBIC on day one.


[Operator Instructions]

David Gladstone

Any other questions?


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

David Gladstone

Thank you all for attending our meeting. I hope to see you next quarter and hopefully we have a lot of good news next. That’s the end of this conference call.


This concludes today conference. You may now disconnect your lines at this time. Thank you for your participation.

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