Gladstone Capital's (GLAD) CEO David Gladstone on Q3 2014 Results - Earnings Call Transcript

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Gladstone Capital (NASDAQ:GLAD) Q3 2014 Results Earnings Conference Call July 31, 2014 8:30 AM ET


David Gladstone - Chairman and CEO

Bob Marcotte - Executive Managing Director and President

Melissa Morrison - CFO

Michael LiCalsi - Internal Counsel and Secretary


Troy Ward – KBW


Good day, ladies and gentlemen, and welcome to the Gladstone Capital Corporation Third Quarter Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to David Gladstone. Sir you may begin.

David Gladstone

All right. Thank you, Destiny, for that nice introduction and hello everyone out there. This is David Gladstone, Chairman. This is the quarterly earnings conference call for shareholders and to our analysts and this is the call for Gladstone Capital common stock traded on NASDAQ under GLAD and the preferred stock is traded under the symbol GLADO at the end.

Thank you all for calling in. We love to have these calls. It's happy time to talk to shareholders and wish we could do this more often. We like to give updates on our company and our portfolio of companies, the business environment and as always, you have an invitation, it's open to come by and visit us anytime here in McLean, Virginia. We're just outside of Washington D.C. Stop by and say hello. We have lot of folks here and I think you will see some of the best folks in the business.

Now a word or two for my General Counsel and Secretary, Michael LiCalsi, he is also President of our Administrator and he has some important information for everyone listening to this summary presentation. Michael?

Michael LiCalsi

Good morning, everyone. 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 and other factors even though they are based on our current plans, which we believe to be reasonable.

Many of these forward-looking statements can be identified by the use of certain words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. 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 10-K filing and our registration statement as filed with the SEC, all of which can be found on our website at or the SEC's website at

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, except as required by law. Please note that past performance or market information is not a guarantee of future results.

Please take the opportunity to visit our website and sign up for our email notification service. We don't send our junk mails, just timely news on your company. You can also find us on Facebook, keyword, The Gladstone Company and follow us on Twitter at Gladstone Comps. I hope our listeners will read our press release issued yesterday and also review our Form 10-Q for our third quarter ended June 30, 2014, again filed yesterday with the SEC.

You can access the press release and the 10-Q on our website and also on the SEC's website at This presentation is also on our website.

And now, we will begin with a hearing from Gladstone Capital's President, Bob Marcotte.

Bob Marcotte

Thank you, Michael and good morning, everyone. Let's begin by reviewing Gladstone Capital's portfolio activity for the quarter, any significant changes in the portfolio of credit, portfolio income profile and then conclude with an update on the investment climate and market place that we operate.

As many of you know, we provide loans to privately held U.S.-based businesses and target companies in the lower middle market with $20 million to $100 million of revenue and $3 million to $15 million of earnings before interest taxes and depreciation. Providing capital to these companies allows them to grow, make acquisitions of other companies and they will be used to refinance existing debt.

We invest in companies with profitable operations, sustainable competitive positions and experience management teams using a combination of senior or subordinated loans and sometimes with small amount of equity.

With respect to investment activity, during the quarter ended June 30, 2014, we made $3.4 million in either follow-on and new syndicated financings and had three early payoffs at par aggregating $5.4 million, which produced $500,000 in exit fees.

In terms of our direct origination activities, three of the awarded investments targeted to close during the quarter were delayed beyond the end of the quarter. Subsequent to June 30, we closed $7.1 million follow-on subordinated debt investment in Francis Drilling Fluids, a private equity backed company to fund a strategic acquisition which enhances the core oil and gas service operations and provides you with increased scale.

The two other awarded transactions which aggregate $16.3 million are late in the documentation process and are anticipated to close shortly. While we are disappointed with this production slippage, we are approaching the elevated risk levels in the market cautiously and are encouraged by the [recent] (ph) awards that have validated our investment offerings and [reported] (ph) better pacing of our investment production into the current quarter and beyond.

With respect to the quality of the portfolio, on the whole, the portfolio valuation was down quarter-over-quarter due almost entirely to declining enterprise values on three deals. These deals were only partially offset by incremental improvement in performance and comparable multiples for smaller -- several smaller investments.

As of June 30, 2014, we had a net increase of $22.8 million in unrealized depreciation from last quarter, bringing the cumulative unrealized depreciation to $85.3 million. The biggest contributors to the net unrealized depreciation to the quarter were valuations related to RBC Acquisition, also known as Reliable and Midwest Metal Distributors.

With respect to Reliable, it's a manufacturer of active pharmaceutical ingredients or APIs and high purity ingredients for generic drug manufacturers. In the case of APIs, the company is intimately involved in the FDA drug approval process and as a result has significant contractual protections to support these development efforts.

Within the past quarter one of Reliable's key customers communicated their intent to exercise a contract option that may alter the timing of future revenue and cash flows to the company.

Pending further clarity from this customer, which is expected shortly, we have adjusted our valuation consistent with the existing operations forecast and cash flows as well as commissioned an expert third party strategic review of the company's operations and to support any potential contractual adjustments that may come.

Midwest Metals is an aluminum service center and despite strong sales performance, and that the [incurred] (ph) on all loan obligations the long-term [bouncing] (ph) in aluminum prices have impacted the company's margins and cash flow. In light of the current business outlook, scaling competitive position, we have moved to adjust the valuation in line with prevailing enterprise valuation, consistent with discussions with investment bankers and third party inquiries.

Our investment in Sunshine Media Holdings remains on nonaccrual and is still a work in process although as reported last quarter, it has stabilized and is cash flow positive. Heartland Communications, a small radio broadcaster, was placed on nonaccrual last quarter due to liquidity concerns and Midwest was placed on nonaccrual this quarter.

These three nonaccrual companies have combined debt cost of approximately $52 million or 16% of the cost basis of all debt investments in the portfolio and a combined fair value of $13.6 million or 5.6% of the fair value of all debt investments in the portfolio.

We remain diligently focused on managing these nonaccrual investments to achieve sustainable profit levels that can support a marked return on our investment positions or as necessary take alternative actions.

We've had some success in turning several of our nonaccruals around in the last year and were able to recover a meaningful portion of our capital from them. However, this does not mean that we can do it again or that we will not place other companies on nonaccrual in the future.

With respect to the portfolio income profile income profile, the weighted average yield on the -- the weighted average yield on interest bearing debt investments in our portfolio has remained consistent over the last several quarters and was 11.5% as of June 30, 2014, which excludes any success fee income.

Inclusive of the success fees, our yield on the quarter would have been 12.6%. We continue to obtain LIBOR floors on our [floating investment] (ph) and the weighted average floor on our variable rate loans was 2.1%, while the weighted average margin is 9.5%.

Our proprietary loans totaling approximately 80% of the total portfolio cost had an average all-in rate of 12%, while our syndicated loans totaling 20% of our portfolio cost had an average all-in rate of 10.6%.

Looking at the quality of our portfolio income, our non-cash sources of income, which for us are original issue discount or OID and paid in kind or PIK income continue to be below our BDC peers and represent less than 1% of our investment income over the last several years. OID is typically associated with our syndicated investments and has accreted over the life of the loan and not reflected in the cash pay rates on our scheduled investments.

PIK income is recognized over the life of the loan and is not collected as cash, but is added to the principal balance to be collected at the maturity date. PIK rates are typically between 1% and 2% and currently we have 20 loans with OID and three loans with a partial PIK component.

Additionally, we have recognized the significant amount of non-interest income over the last several quarters, which is primarily due to what we call success fees, which are fees generally due to the change of control of the company and are recorded when received in cash.

We received success fees totaling $1.6 million over our entire fiscal year 2014 to date in addition to a variety of other prepayments or distributions, which Melissa will discuss later.

As of June 30, 2014, approximately, 44% of our interest bearing debt investments had success fees accruals. The weighted average accrual interest rate for success fees is 2.4% per annum of the accruing principal balance. At quarter end we had off-balance sheet success fee receivables of approximately $11 million, which equates to $0.53 per common share that would be owed to us if payment was triggered. Due to their contingent nature, there are no guarantees that we'll be able to collect any of these success fees and as such, we do not include them in our reported yields.

In all, our total operating income on the quarter was up 9.1% from the prior quarter, due to the increase in other income and we are expecting this elevated level of other income to continue into the fourth quarter. As of the date of the call, we had received $200,000 in other income due to two portfolio companies paying off subsequent to June 30, for a total cost basis of $5.4 million.

With respect to the backlog of loan opportunities and outlook, GLAD's deal pipeline and pipeline of loan opportunities is healthy. We continue to see heightened competitive pressure in the lending marketplace for senior and subordinated debt investment. This has resulted in yield compression for increasingly riskier, higher leverage investments.

Competition is most pronounced at the larger end of the middle market with the supply of capital from banks or BDC, seeking to grow assets and larger investment funds are outstripping leverage finance demand. In spite of this increased competitive environment, we've been able to add seven new proprietary investments and six new syndicated investments since the beginning of our fiscal year, excluding any pending proprietary deals we hope to close within the next month.

While the investment climate is more challenging, we'll continue to be selective and build our portfolio with sound investments in sustainable businesses with attractive risk adjusted returns while maintaining our overall portfolio yields.

We're focused on leveraging our established reputation in the lower end of the middle market and investor oriented financing approach to more aggressively engage the private equity sponsor community as they are and represent a substantial portion of the potential investment opportunities in the lower middle market.

These constituents value the dedicated market focus, the level of engagement needed to understand the business and are adapted to the unitranche financing solution we're able to deliver and generally welcome the opportunity to establish a long-term financial partnership.

Given the competitive syndicated loan market conditions including limited covenants, elevated leverage levels and lower yields, we've not seen much in the way of attractively priced investments of late and do not expect these to be a significant part of our asset growth in the near term. The level of refinancing activity appears to have abated and our repayments were down 35% quarter-over-quarter in our portfolio, which reflects the extended period of lower interest rates and capital availability.

Our biggest focus going into the fourth quarter will be managing the more challenging credits in the portfolio referenced above and building on the new investment origination momentum to support future portfolio growth. We're actively working our portfolio challenge and are hopeful to be able to announce several resolutions in the coming quarter.

Despite some of the broader investing market pressures, we continue to be optimistic and we're well positioned to originate lower leverage, attractively priced investments consistent with the lower end of the middle market and we will generate solid asset and income growth over the coming quarters to enhance the bottom line for the benefit of the shareholders.

And now, we'll turn it to our Chief Financial Officer, Melissa Morrison, who will report on the fund's financials for the quarter. Melissa?

Melissa Morrison

Thank you, Bob and good morning, everyone. I will review GLAD's financial results and overall portfolio statistics for the quarter. Starting with the statement of operations for our third fiscal quarter of 2014 ended June 30, 2014, as compared to our second fiscal quarter at March 31, 2013, net investment income was $5.1 million or $0.24 per share, which is an increase of 12.8% when compared to the prior quarter of $4.5 million or $0.21 per share.

Investment income increased quarter-over-quarter by 9.1%, primarily due to an increase in other income of $800,000, from increased success fees, dividend income and other fees received during the three months ended June 30.

This quarter, we received $500,000 in success fees from the early payouts at par of [TiVo] (ph) acquisition company, $700,000 in net distributions from FedCap Partners, LLC and $400,000 from illegal settlement related to a previous fleet exited portfolio company.

Interest income on debt investment remain consistent quarter-over-quarter at $8.2 million as we had two new deals funded at the end of the March quarter offset by three investments paid off in part during this quarter totaling $5.4 million.

Offsetting the increase in investment income for the quarter was an increase in operating expenses of 5.7% as compared to the prior quarter, primarily due to the $300,000 increase in dividend expense on our mandatorily redeemable term preferred stock as a result of the increased number of shares of a new series 2021 term preferred stock issued at a prior issue albeit at a lower rate.

Of note, no significant credit was needed during this quarter of last quarter, but we did credit the incentive fees for our first quarter ended December 31, 2013, in order to infer that distributions to stockholders were covered entirely by net investment income, which they had then over the last three years. This highlights our continued commitments to prudent growth.

The low net investment income on our statement of operations are realized and unrealized changes in the fair value of our portfolio. Realized gains and losses come from actual sale or disposal transactions of our investment. When we mark investments to fair value on our statements of assets and liabilities, the change in fair value quarter-over-quarter is recognized in our statement of operations as unrealized appreciation or depreciation. This is a non-cash event and is required by generally accepted accounting principles in the U.S. or GAAP rules for investment companies.

During the quarter ended June 30, we recorded minimal realized activity on our portfolio. During this quarter, we did record net unrealized depreciation of $22.8 million, which as Bob touched on earlier related to a decline in performance from certain portfolio companies and to a lesser extent a decrease in comparable multiples quarter-over-quarter.

This decrease was only partially offset by unrealized appreciation on certain companies in the portfolio due to increased operational and financial performance and to a lesser extent an increase in certain comparable multiples.

Over our entire portfolio, excluding reversals, the net unrealized depreciation for the three months ended June 30 consisted of approximately $24.4 million of depreciation on our debt investment and $1.7 million of appreciation on our equity investments.

Overall, our entire portfolio was fair valued at approximately 76% of cost as of March 30, which is down from 82% in the prior quarter and consistent with our fiscal year ended September 30, 2013.

The cumulative net unrealized depreciation on 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 process, which could ultimately reduce our income available for distribution to stockholders.

The bottom line on our statement of operations is a change in net assets resulting from operations as is a combination of net investment income, net unrealized appreciation or depreciation and net realized gains or losses. For the June 30, 2014 quarter end, the net decrease in net assets resulting from operations was a 20.2 million or $0.96 per share versus a decrease of $2.1 million or $0.10 per share in the March 31, 2014 quarter end.

The quarter-over-quarter decrease of $18.1 million or $0.86 per share is primarily driven by the larger net unrealized depreciation recorded this quarter as compared to the last quarter.

Now, let's review Glad's statement of assets and liabilities. As of June 30, 2014, we had approximately $283 million in total assets at fair value consisting of $265 million in investments at fair value and $18 million in cash and other assets.

Liabilities totaled approximately $102 million consisting of $35 million in borrowings at cost on our line of credit, which has a revolving period ending in January 2016, $61 million in term preferred stock, which has a mandatory redemption feature at the end of 2021, and $5.9 million in other liabilities.

As noted earlier, in May of 2014, we completed a public offering of approximately 2.4 million shares of 6.75% series 2021 term preferred stock at a public offering price of $25 per share. Net proceeds of the offering were approximately $58.5 million and were used to voluntarily redeem all upcoming shares of our 7.125% series 2016 term preferred stock and to repay a portion of outstanding borrowing under our credit facility.

In connection with the voluntary redemption of our series 2016 term preferred stock we recognized a realized and extinguishment of $1.3 million on our statement of operations, which is primarily composed of the unamortized deferred issuance cost. We believe by refunding our term preferred stock, we have enhanced our liquidity position, extended our maturity profile and reduced the effective cost of our preferred to approximately 7.3%.

Overall due to the increased depreciation on our investment portfolio, our net asset value decreased quarter-over-quarter from $206 million or $9.79 per shares of March 31, to $181 million or $8.62 per share as on June 30, 2014. This is out however from the NAV per share of $8.60 a year ago, June 30, 2013.

At the time of this call, we have about $82 million in aggregate cash and availability on our $137 million credit facility. So we have enough capital to deploy for new originations while funding operating expenses and making distributions to stockholders.

In summary, we believe our balance sheet is conservative and that our overall risk profile is low. BDC rules restrict leverage to one-to-one debt-to-equity and currently GLAD's weighted average leverage of about 52%, which is relatively low as compared to our BDC peers.

We will need to consider other financing forces over the next several quarters depending on our new deal originations and available capital. Gladstone Capital is primarily a lending fund with a targeted portfolio mix of 95% in senior and senior subordinated debt security and 5% in equity.

Currently our portfolio is at a 92% to 8% allocation of debt-to-equity investments with 50% of the portfolio invested in senior debt and 42% in senior subordinated debt. We ended the June 30 quarter with 49 companies in the portfolio, which is down slightly from 51 at the prior quarter end.

The portfolio consisted of one to 49 companies in 23 states and in 18 different industries. We continue to have a highly diversified portfolio by industry classification and by geographic region. At fair value our largest investment concentrations are in electronics, healthcare, education and childcare, printing and publishing and diversified manufacturing.

Our five largest investments in our portfolio at fair value as on June 30, totaled $70 million, 26% of our total investment portfolio, which was consistent with last quarter. Our credit facility and regulations under the regulated investment company IRS rules, both contains certain concentration and diversity limits, all of which we have met and continue to meet as of June 30.

We target to have our portfolio with 90% of debt investments at variable rates and 10% at fixed rates to help us manage interest rate risk. And we are currently at 85% to 15% variable to fixed rate allocation. Our variable rate loans generally set to the one month LIBOR usually have a minimum rate on floor, so that the effects of declining interest rates are mitigated and when rates begin to increase, we should see higher income.

In summary, we have limited origination activity this quarter with several deals slipping into our fourth quarter ending September 30, 2014, and are hopeful that with recent momentum we can make up a portion of this shortfall in the current quarter.

Our focus is on our building our portfolio with investments and strong operating cash flow businesses and stable to growing industries. This will be necessary in order to grow our net investment income and show our shareholders accretive results in the future.

And now I will turn the call back over to David.

David Gladstone

All right, thank you Melisa; that was a good report and we had good reports from Bob and Michael as well. So we are off to a good start for this new quarter.

For the quarter ending June 30, 2014, we improved the liquidity position by doing a public offering of $61 million in new series 2021 term preferred stock and we redeemed out our series 2016 that was going to have be redeemed out next year anyway. It also makes us very favorable to going forward and negotiating our line of credit, which we’ll doing June of this year.

We maintained strong portfolio yield at about 11.5% on a quarter-over-quarter and we generated about $2 million with other income. All of these are good strong movements. We were about 116% coverage on our dividend in terms of income this quarter. So that’s a good sign for all of these loan stocks.

One of our biggest challenges will be to continue to find new investments. You heard Bob present that and I think the whole industry in saying that these days. There are a lot of capital providers out there including BDCs and FDICs, which are bidding down the rate on loans to small businesses.

So we have to pick our -- pick and choose very carefully. Additionally some of the banks have excess capital and looking for loans, but I think we are a much better return for those people who need us rather than the banks. Many borrowers are looking to take advantage of the capital availability out there and rates by -- and the rates and they actively shocked the financing but most are not looking for just low rates.

They are looking for a partner and I think we can help them succeed. We have a lot of successful people here that can add to any portfolio company.

So this is where we excel, where we bring more to the party than just a couple of percentage points changes in rates and with all of the business experience we have, the strong relationships we have with other financial sources, I think we bring a powerful package to each of the businesses that we look at.

We are hopeful that several of the deals that we were looking at this past quarter will progress along in funding in this current quarter. We’ll continue to focus on investments that we believe will survive any possible recession. The first quarter decline in GDP for the United States gave us a real scare, but this new return, new GDP number looks like its back up again.

We have some strong companies in the portfolio but we will like not to test them with another recession today. We continue to avoid industries in the housing area, the banking industry, high technology, venture capital, commodity products or highly cyclical industries. We’ve done a few of those over the years and unless you catch the cycle just right, you can get hurt.

We still worry that the available capital will be a concern in the near future as we utilize our current credit facility and look to raising additional long term debt and equity capital as time goes on. The recent economic indicators over 4% or GDP and that compares with the 2.1% negative that we had in the prior quarter, so that means we’re averaging about 2%.

Let’s hope that that’s okay and stays there. If it does, we can probably all muddle through, but we continue to monitor the economic outlook, which affects all of the investment climates including those in which we operate and we have the same concern that I mentioned each time. We watch the uncertainty around the Federal Reserve Monitory policies that can impact future interest rates. I personally don't believe there is going to be a lot of increase in interest rates but one never knows.

Fiscal crisis in the federal government is still top of mind for all of us. The federal deficit is over $17 trillion and continues to climb as the government spends and all of this is really unsustainable. At some point in time it will has to stop. Many private companies like those in which we invest, say that there is much -- too much regulation in many areas. It's hindering their performance and expansion and job growth.

They cite over and over again, healthcare, financial services, energy environmental emissions, all of those are hindering their ability to grow and create jobs. And there are fewer small businesses today than there was in the recent past and backed some of estimated -- of back to 1974 in terms of creating new small businesses.

Despite the economic issues, our funds are in good steady phase, good history of earnings and paying our dividend through some very uncertain times and I believe we’ll have the strength to weather any economic downturn that’s thrown at us. We have very good banks that are supportive and so we don’t look at that as a downer these days.

The strength we have is -- continue to buy our stocks -- more stockholders to come in and buy our stock obviously. I am one of the largest stockholders, maybe the largest and I do love dividend. So we're hopeful that over the future, we'll find a way to increase the dividend. At July 2014 our Board of Directors declared monthly distributions on common stockholders at $0.07 per common share and they also did a little over $0.14 in the term preferred, each of the months of July, August and September. The Board will meet again in October to consider and vote upon the monthly distributions for October, November and December.

Through the date of this call, we’ve made about a 129 sequential monthly cash distributions to our common shareholders and we did several quarters of distributions before we started the monthly.

As the current distribution rate of our common stock and with the common stock price now at about $10.02 we’re yielding about a 8.4%, which is a good strong yield for such a strong company as ours. Our monthly distribution is 6.75% for our newly issued preferred stock translates into a little over $0.14 and that’s going to give us a yield of about 6.5% with the stock trading at $26.03 as it was yesterday at the close. Both of those are in good shape these days.

In summary, this quarter we were able to report on successful capital offering, resulting liquidity position. So we're much stronger than we were before that offering and we’ll have to work to show you how new deal originations occur in this quarter and our company team has a very successful track record of investing in middle market businesses and working together multiple economic downturn.

So think we’re in really good shape in this company and Gladstone Capital continues to be very interactive invested in opportunity. Total investment income was up, net investment income was up, net investment income per share was up over 14%, so we’re in great shape these days. I know it seems odd that the net asset value fell substantially this time but I think that maybe corrected next quarter. It could be if things have worked out, one or two of these portfolio company.

Well at this point, Destiny would you come on and let’s have some questions from those people out there in radio [indiscernible]?

Question-and-Answer Session


(Operator Instructions) Our first question comes from Troy Ward of KBW. Your line is open.

Troy Ward – KBW

Great. Thank you and morning David and the rest of the team. David can you just back up your ending comment there, quite also have me a little perplexed. You talk about how great everything is going and earnings are up and everything and then you recognize that book value that was down 12% quarter-over-quarter. Then you kind of give the response that you think that can rebound. What gives you the confidence that the book value is going to rebound, the buck and change that we lost this quarter?

David Gladstone

Well I was taken down primarily because of the uncertainties around one particular portfolio company and that was a day downer. We just did not -- we do not know even today exactly what’s going to happen there but we think we have a strong position. Bob, you want to chime in on that?

Bob Marcotte

Troy, I have illuminated a little bit on Reliable being the biggest swing there. I think I can make a few statements. First, we are very confident in the company’s contractual protections in the situation. The contract party, we are dealing with, the counterparty is a very reputable and creditworthy entity. The size of the market for the underlying drug is well established.

The unknown at this point is the timing and structure of the contractual compensation that we feel we -- that the contract requires and we expect clarity in the current quarter.

So we are in a situation that we feel protected. We feel there is a resolution and a likely strong economic outcome but as relates to pure valuation, it is impossible to determine until that has been concluded, so we have taken intact the focus on what the business is doing today and we would expect that contractual resolution to be something that we can report relatively soon and effectively address your question of the central recovery.

David Gladstone

So Troy, our full approach [of late] (ph) has been to be much more conservative. I think in some of our brethren in the business and not to say that they’re bad and we’re good. It’s just that we take as conservative approach as we can to net asset value. I don’t want anybody to buy based on some larger net asset value.

Troy Ward – KBW

How do you couch those statements with just the historical credit quality? We’ve known each other for a long time and it’s always had a conservative tone but the credit quality quite obviously hasn’t followed. If you look at your credit quality, realized losses versus peers, it isn’t more -- it isn’t better than peers. How do you compare the actual performance to that statement?

David Gladstone

I think it depend on which peers. If you choose the peers that came into the business after the recession, you are right. They didn’t have to take the downer, so if you remember we sold off an enormous amount of our really good loan in order to stay through the recession and pay Deutsche Bank who didn’t go forward with our renewal at the time as they were.

So I think we’ve done very well and this quarter shows that we continue to peak up in terms of earnings and net asset value is down but who knows next quarter it may rebound back by $18 million that we took it down by. Stay tuned. All I can say is I feel comfortable today that we’re going to earn the dividend and continue to grow the net investment income but there are no guarantees in life.

Troy Ward – KBW

Okay. And then one last follow-up on for Bob probably, more color on the Midwest Metal as well. The last quarter and again this quarter, you referenced aluminum prices. If we just look at the valuation I think you made that deal in 2010. At the end of 2012, you had it marked at $0.98 and six months ago at the end of 2013, it was $0.99 on par.

In the last six months aluminum prices have gone up 12% from $0.80 to $0.90 and now we see the valuation of Midwest Metal went from $0.99. I think it’s at $0.14. I am sorry it went from 99% on par down to 14% on par this quarter. Can you again correlate those statements with aluminum prices and why the valuation went down?

Bob Marcotte

I think the only -- your comment with respect to aluminum prices, its only in the last -- I believe less than 60 days the aluminum has moved up. So we’re obviously dealing with a long term swing and the cumulative effects on the earnings of the company and that’s obviously going to be more reflective on the -- that 12 month performance, which we have to weigh as we think about valuations and consistencies across our portfolio. So that recent upswing in aluminum pricing quite frankly is a welcome relief and it’s beginning to impact results.

But obviously we’re mindful of some of the operating and purchasing economies of scale in a business such as this and as a result of that I think we’ve been more conservative in approaching where the valuations might be and mindful of strategic third party discussions and approaches they had, I will say we’re also actively engaged in discussions to address this situation but really can’t comment beyond that.

At this point I would say the cumulative effect of the downed prices, the competitive profile and the exit alternatives are baked into those numbers, but I will say it also rebounded in the last month or two and it is improving and frankly I think that helps our position and puts us in a much better stance to potentially see upside in that situation, but we’re basing it on the last 12 months performance and that’s what reflected in the valuation.

Troy Ward – KBW

And I think one interesting point would be Sentry Aluminum CNN reported today it’s a Midwest aluminum manufacture distributor and the stock price has gone from 10 to 18 in the last six months, so it just continues to be a little perplexing why some of your investments seem to go opposite of the tone of management and in this case the opposite of what appears to be a pretty good comp in the marketplace.

Bob Marcotte

I think you have to look at that -- that business is I believe a multibillion dollar business. It’s the largest distributor and service center in aluminum in the country. I think it speaks to the point that I have raised in terms of operating efficiencies, purchasing economies and obviously there is some -- there is a significant turn that happens in a business when the price outlook begins to shift but that’s an equity valuation.

That’s not necessarily a trailing cash flow valuation and we’re focused on the trailing demonstrated cash flow valuation and we’re also dealing with a situation where we’re not senior lender. We're a junior lender in this particular situation as you can see from our scheduled investment and there is obviously debt in this investment. So until the cash flow actually is produced, we can’t look at what the outlook is likely to be in a business to determine what the value of our debt instrument is. So I agree with you.

Troy Ward – KBW

That’s good color. Thanks Bob.

Bob Marcotte

Okay. Can we have the next question please?


(Operator instructions) And I am showing no questions at this time. I would like to turn the call back to David Gladstone for closing remarks.

David Gladstone

All right thank you all for calling in. We’ll see you next quarter and see if some of the things that we’re hopeful to happen in this quarter happen such as new transactions and revaluation of some of the ones that got hit this quarter. Thank you all for calling in. That's the end of this conference call.


Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.

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