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

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Gladstone Investment Corporation (NASDAQ:GAIN) F2Q12 Earnings Call October 30, 2012 8:30 AM ET


David Gladstone - Chairman & Chief Executive Director

David Dullum - President

David Watson - Chief Financial Officer


Daniel Furtado - Jefferies & Co.

Ross Demmerle - Hilliard Lyons

David West - Davenport & Company

John Rogers - Janney Capital Markets


Good morning and welcome to the Gladstone Investment Corporation’s second quarter ended September 30, 2012 shareholder’s conference call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to David Gladstone. Please go ahead.

David Gladstone

Thank you, Ashley. This is David Gladstone, Chairman, and this is the quarterly earnings call for shareholders and analysts of Gladstone Investments. And we have common stock traded at GAIN and we also have some preferred stock, trading symbol GAINP, for preferred. Thank you all for calling in. We are always happy to talk to shareholders about this company and I wish there was really more opportunities. We are trying to figure out another way to talk more to shareholders.

Hope you take the opportunity to visit our website,, where you can sign up for email notices so you receive information about your funds in a timely manner. And please remember that if you are ever in the Washington D.C. area you have an open invitation to come by and visit us here in McLean, Virginia. We are just outside of Washington D.C. Please stop by and say hello, you will see some of the finest people in the business.

I do want to mention that hurricane Sandy came through and packed a lot wind and rain and we are very thankful that it was not devastating here in McLean as it has been in some of the surrounding areas. The office we are in here on a park in Tyson’s Corner with about 170 office buildings seems to be full power on. They seem to be operating, all the buildings seem to be good. At least all the buildings I went by this morning had lights on. Traffic lights, a couple of them out but everything else seems to be good. Surrounding residential areas are without power primarily due to the trees falling down and I am sure the power lines, once they get them back up things will be back to normal in a few days.

We have got information from our New York office in Greenwich and they have checked in. At least one of the Greenwich folk has, and they are all fine. So everything seems to be good within the team that’s running your company.

I now need to 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 and other factors even though they’re based on our current plans and we believe those plans to be reasonable. Many of these forward-looking statements can be identified by the use of the words such as anticipates, believes, expects, intends, will, should, may and all of those similar expressions. There are many factors that may cause our actual results to be materially different from future results that are expressed or implied in these forward-looking statements, including those factors listed under the caption, “risk factors” in our 10Ks and 10Qs and in our registration statement that is filed with the Securities & Exchange Commission. All of these can be found on our website at and also on the SECs website at

The company undertakes no obligation to publically 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. So please also note that past performance or market information is not a guarantee of any future results.

First we’ll hear from Dave Dullum. He is President, Board member of the company. He will cover a lot of ground including a view of the future of this company. Dave, why don’t you take it away for us?

David Dullum

Well, thank you, David, and good morning all. So we get into the main part of the review of the quarter, I would like to quickly refresh out memories on what it is we actually do here. And of course the business of Gladstone Investment is to provide capital for businesses that are being purchased with a management team and other equity investors. These are usually companies with annual sales generally between about $20 million and $100 million, which is what we describe as the lower middle market.

We provide subordinate debt and equity and occasionally we do some senior debt if it helps the transaction. This combination of debt and equity produces a mix of assets which is the key really to our strategy. Our debt investments, they provide the income to grow our dividends while we expect the equity that we invest in to appreciate and build the shareholder value over the longer term. At September 30, 2012, quarter just ended and based on their actual costs, our investments consisted of a mix of approximately $221 million or roughly 70% in debt investments and [mez] produced income and about $96 million or approximately 30% in the equity securities portion and this is where we expect to produce capital gains overtime.

This ratio of 70:30 is slightly higher, frankly, in the equity proportion and we would like to have as our goal of roughly 80% debt, 20% equity. But this happens for a number reasons, in some cases the ratio is affected if we have loan payoffs relative to equity or if we in certain cases, which we do occasionally, have to convert a loan to equity in a particular company. Also, obviously, if we like the equity in a transaction we will tend to do a little higher proportion of equity in a transaction. Always keeping in mind, though, what our expectation is on the current cash pay for the portfolio in general.

In the most recent quarter our total interest bearing debt portfolio had a 12.5% cash yield which is actually up from about 12.2% from the prior year’s quarter. The interest bearing debt is our primary source of cash to pay our dividend. Additionally, we often have success fees as a component of our debt instrument. Now success fees, these are contractually due upon the sale of a portfolio company although the portfolio company can pay early at its option. So we recognize these success fees as income only when we receive the cash.

During our most recent quarter we received cash and reported success fee income of $400,000. Further, as of September 30, 2012, approximately 76% of our interest bearing debt has these success fee due, with an average contractual rate accruing at about 3.2% per annum on all of the outstanding debt. So it’s pretty decent rate of return. In total on debt securities, this has created success fees owed to us of approximately $11 million, which is today about $0.50 a share.

Now we do not have these success fees recorded on our balance sheet though we do report them in the written part of the report to shareholders. Please note though that there is no guarantee that we will be able to collect all of the success fees owed to us. Now while the equity securities we own is not producing current cash income, we do expect these equities to appreciate and add to the shareholder value. Since mid-2010 for instance, we have realized capital gains of about $29.3 million and this is through the stock ownership in various portfolio companies.

So as our portfolio builds, our goals continues to be to increase the interest income and the payout to dividends and also to seek asset appreciation through growth and equity value of the stocks of course that we own. Now, how do we do all this? Well, deal origination. Generally, we obtain our investment opportunities by partnering with management teams, private equity firms and other sponsors of buyouts. So our combination of debt and equity gives us, we believe, a competitive advantage in this area. In that it provides two very important portions on the capital structure in a buyout transaction.

In addition, we may find opportunities to provide capital which support a business owner who is not really seeking to sell the company outright, but wishes to sell a portion of his company or her company, while financing continued growth. Now in this case we will invest in debt and equity in exchange for a significant ownership in that particular business. Interestingly in July, the SEC approved an exemptive order that we had applied for a while ago, that expands our ability to co-invest with our sister BDC, Gladstone Capital Corporation. Now this provides origination opportunities on a broader range of companies and actually flexibility to invest in some larger companies while at the same time keeping our investment amount in a single portfolio company within the regulatory guidelines of each individual business development company, meaning Gladstone Capital and Gladstone Investment.

To date, we have made none of these co-investments. In September 2012, our board of directors approved limited revisions to our investment objectives and strategies while will go into effect on January 1, 2013. All of our current portfolio investments you see now do fit within the scope of our revised objectives and strategies and no changes will need to be made to the current portfolio as a result of this revision. That’s sort of the activity that we have for the quarter.

Well, we added two new buyouts to our portfolio. We invested $22.5 million in a company called Ginsey Holdings. This is a company which designs and markets a broad line branded juvenile and adult bathroom products, although they are expanding into other parts of the house, if you will. We also invested $21.3 million in a company called Drew Foam Companies, which is a foam molder and fabricator for packaging some aspects of construction and insulated shipping container applications. We also invested about $6.7 million in six of our existing portfolio companies and we actually received back repayments of approximately $14.2 million.

After the quarter-end, we invested about $0.5 million additionally, and received principal repayments of approximately $1.6 million again from couple of our existing portfolio companies. The result of all of this is that at the end of the quarter, we had $317 million invested in portfolio companies at cost. We maintained our dividend to stockholders for the quarter ended September 30 of $0.05 per share per month. And our board has also declared a dividend of $0.05 per share per month through December of this year. So we certainly hope to continue to make favorable dividend payouts for the foreseeable future.

In updating the actual portfolio itself, in general the companies are performing well, not without challenges however. And this is why we do work very diligently through our investment management approach, which as I have mentioned in the past, is to limit losses, increase our equity value and preserve the cash flow from our portfolio companies. The things we do for this are, such as we do some strategic and business planning, elsewhere we work with outside resources assisting the portfolio of companies in continuing to review their competitive position and talent among other key business metrics. So we need to be proactive there.

When necessary, we provide operating management support and here we are able to tap experienced operating management talent from our staff or from a pool of talent that we have cultivated over the years. These folks help the portfolio companies streamline operations and evaluate add-on acquisitions as may come up. Also, we have mentioned this before, it’s really in interesting tool in that we conduct conferences for the CEOs of our portfolios companies. These conferences facilitate interaction between the portfolio companies management teams so they can exchange ideas such as best practices in purchasing, pricing, organization, health and manufacturing disciplines. We believe these activities are really important as a competitive strength to the total portfolio and that we have had very good results and in fact from the CEOs report for the companies and we expect to continue doing this.

Now the result of all these efforts is really reflected in really turnaround performances of two of our portfolio companies that we had briefly mentioned in the past. One is Galaxy Tools and the other is a company called CCE. Now, in case of Galaxy we restructured in July of 2010. We actually converted about $12.3 million of our total debt investment into preferred equity, and as a result of all that we actually experienced cumulative unrealized depreciation of about $19.4 million through June 30, 2012. Along the way we made some executive management changes. We facilitated strategic planning. And these have resulted in significant growth, cost savings, and now positive earnings. Therefore, these efforts are beginning to really be reflected in the value of the company and we have seen $5.8 million in unrealized appreciation during the quarter. So we are headed in the right direction and the prospect is very good.

For CCE, we restructured that in October of 2011 where we converted $4 million of our debt in to preferred equity, replaced the remaining debt investment on a non-accrual status, and as a result of all that we experienced cumulative unrealized depreciation of approximately $11.7 million through March of 2012. Now as with Galaxy, we made some changes here and we implemented these and these have resulted again in positive earnings. Now being reflected in the company's unrealized appreciation over the last two quarters of $6.9 million. Additionally, CCE is again making its interest payments to us and now we expect to have them back on accrual status for the quarter ending December 30, 2012.

So Galaxy and CCE are really good examples of this philosophy we talk about and the dedication to get our investments operationally sound, preserve shareholder capital versus say walking away from an investment because things are not going well. And therefore our companies, when they get difficult, we stick with our companies. We still have work to do though, with companies such as [ASH] which is the one that’s still non-accrual, though in general we believe all overall portfolio is really well balanced at this point.

How is our market place for transactions? Well, slew of opportunities for buyouts. We believe it continues to be very good both in terms of quality and quantity. The general economic conditions of course still continue to create uncertainty and we continue to see improved stability in the middle market companies returning to profitability in some cases. So this improvement is causing an increase in the supply of quality businesses that are for sale, as certainly owners are taking advantage of these positive results. Senior bank financing is also becoming available and pretty reasonable price which accommodates the leverage in any particular transaction.

So as a result we are finding good opportunities where the valuations that we look at and the way in which we look at companies relative to what's called EBITDA or the operating cash flow, we can pay around 5 to 6.5 times for these companies. There are certainly higher valuations out there and we tend to avoid these. So what's in our pipeline? Well, it keeps growing. We have stepped up our marketing and our deal generating activity. We do stress our competitive advantage I mentioned earlier, where we are able to provide the subordinated debt and the equity in combination to help a transaction get completed.

However, we do continue to be cautious about the economy and we are diligent in pursuit of new investments. We do believe that our marketing efforts and the presence in the marketplace should allow us to continue on this growth trend with additional new investments over the next year. So the outlook and our goal for the fund is to maximize our distribution shareholders while achieving solid growth in both equity values and assets in the proprietary investments in the lower middle market company buyout arena.

And with that I will turn it back over to David Gladstone.

David Gladstone

All right. Well, we will move on now to David Watson. That was a good report Dave Dullum. And David Watson is our CFO and Treasurer. David Watson, go ahead.

David Watson

Good morning and I do hope everyone has stayed safe and dry as Hurricane Sandy passing by a good number of us. I will start with report and I am going to go over our recent capital activity. As I am sure some of you are aware on October 5, we floated a public offering of $4 million of our common stock at a public offering price of $7.50 per share, which was below our then NAV of $9.10 per share. Gross proceeds totaled $30 million and net proceeds after deducting underwriting discounts and operating expenses borne by us, were $28.3 million, which was due to the repaid borrowings under our credit facility.

In connection with the offering, we granted the underwriters a 30-day option which expires in November 1, to purchase up to an additional 600,000 shares of our common stock to cover over allotments. This has not been exercised as of today. These proceeds in part will allow us to grow the portfolio by making new investments, generate additional income through these new investments. And provide us additional equity capital to help ensure continued compliance with regulatory tests and allow us to increase our debt capital while still complying with our applicable debt to equity ratios.

Also on October 5, we extended the maturity date on our credit facility one year with our bankers. As a result, the credit facility is now three years in duration again with a scheduled maturity date in October 2015. If we do not extend it again, all principal and interest will be due in October 2016 or four years out. There remains a one year extension option to be agreed upon by us and our bankers which might by exercised on or before October 2013. All other terms of our credit facility remain the same.

Between the proceeds from our common offering and the extension on our credit facility, we fell we are well capitalized for the reminder of the fiscal year to continue making good investments for our shareholders. Turning to our balance sheet. At the end of the September quarter we had $374 million in assets, consisting of $267 million in investments at fair value, $93 million in cash and cash equivalents, and $14 million in other assets. Included in the cash and cash equivalents, like prior quarters, is $80 million of U.S. Treasury securities, that we got through the use of our out funds at quarter end to satisfy our asset diversification requirements.

We had $176 million in liabilities consisting of $40 million in term preferred stock, $57 million in borrowings outstanding on our $3 year credit facility, $5 million in secured borrowings, and $72 million borrowed via the short-term loan, and $2 million in other liabilities. In all, as of September 30, 2012, we had $197 million in net assets or $8.93 per share. So we have less than 1:1 leverage on our senior secured borrowings. Currently, we have investments at fair value of approximately $256 million, cash of $6.5 million, and $5 million in borrowings on our credit facility, and $5 million in secured borrowings. And in total net assets of $226 million. We believe this is a safe balance sheet for a company like ours and we believe our overall risk profile is low.

Let's go over to the income statement. For the September quarter end, total investment income was $7 million versus $5 million in the prior year quarter. While total expenses including credits were $3.5 million versus $1.7 million in the prior year quarter leaving net investment income, which is before appreciation depreciation gains or losses, of $3.5 million versus $3.3 million for the quarter last year, an increase of 4.3%. This increase was primarily due to an increase in interest income due to a larger interest bearing portfolio and higher yield on our debt investments resulting from the new investment activity since September 30, 2011.

This investment activity increased our interest income by $1.8 million during the current quarter. This was partially offset by an increase in dividend expense of $700,000 from our term-preferred stock issued in March 2012, and an increase in incentive fee cost of $0.5 million. I think it is important to take a moment to touch on significant but steady growth that we have had in our portfolio and the income over the past two years. The year-over-year growth rate or CAGR over the past years and the size of our weighted average interest bearing assets has been 33.2%. The CAGR over the past two years and the amount of cash interest income recorded has been 42%.

In addition, our weighted average yield on interest bearing debt investments has increased to 12.5% in the current quarter, up from 11.3% two years ago. We believe this positive growth in debt investments has positioned this company well for the future. From a quarter-over-quarter standpoint, our net investment income was up $0.3 million or 6.6% from $3.2 million last quarter to $3.5 million this quarter, which is primarily due to increased interest income of $0.9 million and increased credits from the advisor of $0.3 million, partially offset by increased borrowing cost of $0.4 million due to increased borrowings outstanding and an incentive fee cost of $0.5 million.

Let's turn to realized and unrealized changes in our assets. Realized gains and losses come from actual sales or disposals of investments. Unrealized appreciation and depreciation comes from our requirement to mark our investments to fair value on our balance sheet with the change in fair value from one period to the next being recognized in our income statement. Unrealized appreciation and depreciation is a non-cash event.

Regarding our realized activity, for the September ‘12 quarter-end we recorded a realized gain of $0.8 million related to post-closing adjustments on previous investment exits. During the September 2011 quarter-end we recorded a realized loss of $0.5 million related to similar adjustments. As for our unrealized activity, for the September 2012 quarter-end we had net unrealized depreciation of $3.9 million over our entire portfolio. Which was primarily due to a decrease in multiples and to a lesser extent decreased performance at certain of our portfolio companies, which resulted in depreciation in our equity investments. Most significantly in Tread and Mitchell Rubber.

On the other hand we recorded significant appreciation in Galaxy, $5.8 million and CCE, $2.3 million, due to increased performance for reasons Dave mentioned earlier on this call. During the September 2011 quarter-end we have net appreciation of $10.3 million and that was primarily due to increased performance at certain of our portfolio companies and to a lesser extent an increase in multiples. Our entire portfolio was fair-valued at 84% of cost as of September 30, 2012, down from 85% as of March 31, 2012. And our stock is trading at 83% of net asset value per share. This means that the current price of our stock is 66% below the cost basis of our net asset.

Now let's turn to net decrease/increase in net assets from operations. This term is a combination of the net investment income, unrealized net appreciation or depreciation and realized gains and losses. For the September 2012 quarter end, this number was a decrease of $3 million or $0.13 per share versus an increase of $4.2 million or $0.19 per share in the prior year’s September quarter. The year-over-year change is primarily due to net unrealized depreciation in the current quarter versus net unrealized appreciation in the prior quarter.

While we believe our overall investment portfolio is stable despite certain depreciation over the last nine months and continues to meet expectations, today’s markets move fast and are generally volatile and investors should expect continued volatility in the aggregate value of our portfolio. Currently, all of our portfolio companies are current in payment except for one which remains on non-accrual this quarter. CCE, which is non-accrual but is now currently paying is expected to be placed back on accrual status for the quarter ending December 31, 2012, which could put our non-accrual loans as a percent of our debt portfolio below 6% at cost and at 0% at fair value.

Moving over to our interest rate risk. 78.6% of our loans have variable rates but they all have a minimum or floor in the rate charge. So with the low interest rates that we have experienced over the last number of years, these floors have minimized the negative impact on our ability to make distributions. The weighted average floor on our variable rate loans is 2.9% with an average margin of 9.4% resulting in an all in average rate of 12.3%. The remaining 21.4% of our loans are fixed with an average rate of 12.4%.

On the other side of the balance sheet, we have an existing straight cap on $50 million of the debt on our credit facility in order to have some protection on our cost of funding if interest rates rise over the next couple of years. With that we look forward to maintaining momentum and hope to continue to increase our income generating assets, to increase our recurring income and to increase our distribution to stockholders.

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

David Gladstone

All right, thank you, David Watson. I hope each of our listeners will read the press release and also obtain a copy of our quarterly report called the 10-Q which has been filed with the SEC. That can be accessed on our website at and also on the SEC website.

I think the big news for this quarter are that we’re actively investing in new portfolio companies and we think the rest of the fiscal year will continue to be good for investments and I am looking forward to the next six months. We have been active in the capital market place of course obtaining long-term capital in March with $40 million term preferred offering and again in October just recently with about $28 million common offering. Additionally, we have a favorable line of credit which has been extended until October 2015 with BB&T and KeyBank, so we have room to borrow under that line as well. So we’re looking for new investments for the company to invest in.

We did something this time that I don’t like to do and that is sell stock below net asset value. We did that because we were running out of money to invest and the ratio of debt to equity was getting to high. And by taking some dilution we put the company in good position to grow its assets and we hope we can grow the dividend as well. It didn’t impact the ability to pay the dividends so we should be good for going forward. Also at that time we changed the strategy and objectives. It was more of a cosmetic than it was actual changing anything. We did this because the SEC is now looking more carefully at that section in our offerings and we did this also so that (inaudible) and Gladstone Capital, the two of them, can co-invest and that there would be a lot of clarity in that section of our prospectus as well as what we put out to the public.

This is a fabulous fund. It has a great opportunity in the future so we are looking forward to it. It does have some headwinds like everyone else in the business. Some of these things are commonly, certainly as not growing, they seem to be contracting a bit now. It’s a difficult time to invest but it’s also a good time to find great investments. We ask the question about these things and I am going to talk about on every deal, that is if oil price spike what would happen. Obviously, if oil prices go too high and supply is too dependent on other countries, well we won't fare well during the period of time like that. High gas prices for cars and trucks hurts every business in the United States. And we need to develop more oil and gas and even coal in the United States so we can take care of that problem.

We are also worried about inflation. President’s decision and Congress to continue to expand the money supply ultimately will cause serious inflation in this country. It’s just a matter of when if we continue on the direction that we are going now. It’s really a bad idea that we can borrow and spend our way to prosperity. It’s been disproven not only here but also in hundreds of other countries, and we just think it is a bad idea. So we have to move away from that. Spending by the federal government is still out of control. The government can't continue to print money the way it’s doing now. We are borrowing about $0.43 of every dollar that they spend and the remaining of 2012 it may be as much as 50%.

We have a fiscal cliff that as people call it with great cuts in the government spending that are coming up. And no doubt after the election, Congress and the new President or the existing President will be getting together to solve that problem and my guess is they will kick the can down the road again. The amount of money being spent in the war in Afghanistan continues to hurt us but obviously not as much as when they were going full blast in two wars. We have been told this is going to stop in 2014 and I certainly hope that’s true. And the terrible news is that some parts of the government still want to raise taxes of all kinds. Please tell your Congressman and Senator not to do that. Middle class today pays the bulk of the taxes and they will just be hurt further if taxes are raised.

The trade deficit with China and certain other nations continues to be terrible. China continues to subsidize their industries to the disadvantage of our business. This means our companies can't compete with them and we must have the government that will stop the Chinese from cheating. I just noticed that the China government, their version of the fed, just propped up the banks again with billions of dollars being injected into their banking system. My guess their banks are loaded up with bad real estate debt and they are trying to keep them from having problems.

The continued stagnation in the housing industry, I know there has been a blip but it was statistically insignificant. Home mortgage defaults continue along to drag on our economy. There has been really small changes in the housing business but these small fractions are just not what's needed in order to have a recovery in housing. We see economic problems in the Euro zone and they continue to hurt some companies but we don’t have any investments in Europe so we are in good shape. Some of our small businesses that we have invested in do have some contact with Europe but thankfully it’s not a lot.

Unemployment in the U.S. is far too high. The numbers used by the government and reported by popular press just don’t include all those workers who are part-time but seeking full-time, nor do they include those who have stopped working, stopped looking for work altogether. That said, the more realistic unemployment rate is probably around 18%.

The economy today in spite of all those negatives does have some small businesses that are doing well and it’s not a disaster for them. However, the number of new small businesses that are starting up is the lowest in 20 years. We have just a huge amount of small businesses that are not getting started and this lingering recession is having an impact on our portfolio companies. It’s not a disaster like it was in ’07, ’08 and ’09. But most companies, our portfolio companies, have not seen increases in revenues or backlogs. Some of them are doing extremely well, others are continuing to muddle along and do okay. And there are few that are still not seeing increases and it’s just a very uneven economy today. And we see it in our portfolio as well as in the small business world that we are in every day. I think things will be better as time goes on but it’s sure dragging on at a slow, slow rate.

Our distribution declared by the board in October was $0.05 for October, November and December. This is continued run rate at $0.60 per year. The board meets in January to declare the dividend for January, February and March. At the current distribution rate the stock has been trading although as all of you know NASDAQ was closed yesterday and is closed again today. It’s been around $7.50 a share which would give you an 8% yield, very nice yield for a company that’s as strong as this one. Monthly distribution of 7.25% for our term preferred stock, that translates into a nice return for folks that want preferred stock, which is deep in the money in terms of earnings of this company. Our current price is around $25.25 on NASDAQ’s global market under the symbol GAINP.

Please go to the website and signup for our email notifications. We don’t send out junk mail. We don’t sell your email to anyone else. So go to and signup. You can follow us on Twitter under the name of GladstonComps and you can find us on Facebook under The Gladstone Company.

In summary, as far as we can see the next six months looks okay. The economy is not strong but we are continuing to go forward and look for new investments that can plough their way through this situation that we are in. And I think we will have some good news for you in the future as we continue to grow.

Now let's have some questions from our analysts and so many of our loyal shareholders. Ashley, if you will come on and tell those who are on the call how they can ask a question I would appreciate that.

Question-and-Answer Session


(Operator Instructions) And our first question comes from Daniel Furtado of Jefferies.

Daniel Furtado - Jefferies & Co.

First, they are really actually two relatively straightforward. The first is, Mitchell Rubber, can you talk about the valuation adjustment there that happened during the quarter?

David Dullum

Sure, Dan. Nothing significant really. The company, you know we do our valuations on a look back on a trailing 12. The company continues to perform very well. Had a slight downtick in trailing 12 EBITDA and as I thin David Watson mentioned, there was some multiple compression again not specific to Mitchell but the way we do our valuations. So that had a decline. And it actually had an uptick the prior quarter so nothing unusual. The company is doing really well and actually expanding as we speak.

David Gladstone

And Dan just so you know, we use an outside service to gain multiples that we use to value our companies by. And we use that to adjust the multiple that we bought in that. So if we bought in at a five and the multiple has changed in the marketplace, we adjust that by the change in the marketplace. We don’t use the marketplace numbers because they tend to be extremely high compared to what we have been paying. I hope that answers the question.

Daniel Furtado - Jefferies & Co.

It certainly does. Thank you. And the second is simply, and I am sorry if I missed this, but are there any, over the last 90 days is maybe too short of a window, but are you seeing any ebbs and flows as it pertains to competition in your space right now? Or has it been kind of steady sailing?

David Dullum

I would say pretty steady sailing. I think where we see most competition is in terms of the pure mezzanine type products, I am sure you are familiar with that. As you know we are a combination really as far as Gladstone Investment is concerned, mezzanine and equity. So we are generally not just doing a pure mez type product. We always have our equity in combination which as I mentioned really is a good advantage for us because it really brings that element to the transaction that’s necessary. We are not seeing too much in terms of folks directly competing with us in this combination. So I would say, to use your words, sort of steady sailing.


Our next question is from Ross Demmerle of Hilliard Lyons.

Ross Demmerle - Hilliard Lyons

I realize you have talked about the amount of debt that’s been paid off subsequent to the end of the quarter. But in trying to get a better grasp at what interest expense might be for the current quarter we are in right now, do you have a sense of what your average debt might be during the current quarter?

David Watson

Sure, Ross. This is David Watson. Right now, after we paid off that short-term loan on I guess October 4, of that $71.5 million, we are actually at $5 million on our line of credit. And we don’t expect that to go up unless there is additional deal flow. Additional deals that we make this quarter which we -- what we have been able to do over the past several quarters. So from a interest expense run rate, I mean at this at point it’s 5 million times 4% over the quarter. We also now have a secured borrowing of $5 million. A secured borrowing which is at 7% for the quarter. And again that was required due to the accounting guidance, the ASC 860, where we have a corresponding asset in our portfolio that offsets it. So it’s basically a close up of our interest expense an interest income.

David Gladstone

And, Ross, just to tag on to that. As you see us announce transactions, you will be able to increase the line of credit by that amount and unfortunately we don’t -- and we do dig repayments but just normal repayments. So it will be hard over the next quarter for you to guess what that might be. But I am sorry, there is no way for us to help you out on that one.


And our next question is from David West of Davenport & Company.

David West - Davenport & Company

The press release mentioned that you participated some small parts of a couple of your recent investments to third parties. Could you just give us some background on that and your reasons for doing that?

David Watson

Sure, David, this is David Watson again. So we obviously are trying to manage the exposure at any one given portfolio company down to get it below 5% of our total assets. Again to remind our callers, we have a [RIC] test where 50% of our assets have to be qualifying. And one of the tests for to be qualifying is that certain asset has to be left in 5% of our total assets. So we have to address this. We have had to buy U.S. treasuries with short-term borrowings. And our goal is to reduce those purchases and many of the steps that we are taking include decreasing, taking action to decrease our exposure at certain portfolio companies. So for example, Ginsey, we participated outside of our debt investment and Drew Foam we actually had a senior lender get into that portfolio company and took our line of credit and $4 million of our senior debt investment to get that qualifying for [RIC] purposes.

So we are really strategically managing our portfolio not only to ensure our current income and cash to make our distributions and optimize it, but also to reduce our exposure where we can and where it makes sense to be able to reduce our reliance on the gross up that we had to do every quarter which frankly makes our debt capital look a little funky.

David Dullum

David, this is Dave Dullum, let me just add to that from a DO transaction standpoint. When we do these and go in and specifically as David Watson mentioned, both Ginsey and Drew Foam, two really good companies. The good news is we have the capacity, capability to get those deals closed the way we do them. And we actually do go into them with the expectation as we did here of participating out of a portion of the senior debt. And we look at that and obviously how that impacts our overall current cash. Again, just to give you the sense that we do it with thought beforehand and for some of the reasons David Watson mentioned but also because from the standpoint of putting good quality assets overall on the books that we want to keep. You know we might have to close to do it that way and then again as he said, lay it off.

David West - Davenport & Company

That makes great sense. Did that participation activity generate any fees for gain?

David Dullum

David, it did not.

David West - Davenport & Company

Okay. And then lastly, now that you have done the equity offering here in early October, is there -- and your borrowings are quite low as a result of the payoff, is there any dollar figure of new investments you feel comfortable with adding to the balance sheet at this point?

David Dullum

Well, we just keep doing our job. Our objective all the time obviously is to continue adding good quality assets and that’s what we will continue doing. As we keep doing we will obviously look to continue supporting the growth through additional borrowing as necessary and other forms of capital.

David Gladstone

Just to tag on to that, this is David Gladstone. We will obviously go into line of credit in a significant way. I don’t know exactly where we have stopped, certainly we would want to leave $10 million or so on the line to use for anything that we might need. So we pretty much have room to do two or three more deals in the line of credit.


(Operator Instructions) There is one more question from J.T. Rogers of Janney Capital Markets.

John Rogers - Janney Capital Markets

Just had a question surrounding the decision to raise equity. You know as you guys pointed out the trading at $7.50 churning on 56% of cost and it’s 85% of fair value. How do you weigh raising equity at a discount to book value versus not doing new deals. And so I just wanted to get an idea about the thought process. What you guys see going forward?

David Gladstone

Sure. The thought process is always first, would this damage the ability to pay dividends and so we have to make a judgment call of whether it would damage the dividend. Obviously, if it’s going to damage the dividend paying ability, we aren’t going to do the transaction. In this case we think we have room, plenty of room to pay the dividend and at the same time raise this capital at below net asset value. The real question for us always is what the income coming off the portfolio and what do we need in order to pay the preferred, the debt and then of course the common dividend. So the analysis is, first of all, can we raise money that will be accretive to dividend paying over perhaps not the short-term but certainly over the long-term. And second of all, how diluted is it to the net asset value. That’s the way we think about it.

John Rogers - Janney Capital Markets

Great. And it terms of -- I think you mentioned it’s accretive to raising the dividend over the longer term. So what's -- I wonder how you get there. What is sort of the return -- I guess what are you seeing in the market right now that the return you are going to get on your investments (inaudible)?

David Gladstone

All in returns are in the high teens to low-20s on transactions that we look at in this company. And it comes of course, part from the interest income on the debt side and then hopefully the appreciation and then the cash transaction when we sell our equity positions or do a dividend recap in this company's equity position. And we think both of those look good. Obviously, if we thought there was not much left in terms of the ability to pull money out of the equity section of these companies, we would have to thank to ourselves, are we really on the track needed to both increase the dividend and trigger capital gains.

It’s a mathematical equation that we look at constantly. Every month we look at what can we pay in dividend and then what do we think we are going to trigger in capital gains over this fiscal year and over the next fiscal year, those two projections are done on a monthly basis to try to figure out where we are driving this company.

John Rogers - Janney Capital Markets

That’s great. On the equity side. Where are you seeing the best opportunity? Are there any (inaudible) industries or is that company by company?

David Gladstone

Dave Dullum will answer that one.

David Dullum

Yeah, J.T. just definitely company by company. You know we look at numerous industries. There are some we stay away from. Obviously (inaudible), like you know we do not do any early stage or any high technology driven types of business. So it’s clearly is on a company by company. As I mentioned, earlier when we look at valuation that’s an important part as well. I mean if you are paying high multiples, it obviously impacts your potential equity return for sure. And as a result of that we really work pretty hard. Easy to say, frankly, but we do really work hard trying to get multiples on companies that we think are good companies where there is an upside, not just a multiple expansion opportunity if you will. I think we have sort of proven that out with the actual capital gains that we have taken in the last couple of years and overall even our portfolio. It sort of reflects it as we look out there.

David Gladstone

J.T., did we answer your question?

John Rogers - Janney Capital Markets

You did. I mean and then just one more question. In terms of the sources of capital going forward. Do you guys expect to increase the line of credit, do you look to issue more preferred, or maybe some other source of debt capital?

David Gladstone

Right now we are looking at expanding the line of credit. No guarantee that we can do it. We are out talking to some of the banks about joining. It’s a very safe loan for most of the banks so we think we will be expand it. But you never know the mind of a banker so we will let you know as time goes on whether we have been able to expand that or not. Okay, we have any other questions, Ashley?


I am showing no further questions so I will turn it back over to Mr. Gladstone at this time for closing remarks.

David Gladstone

Well, thank you all for tuning in on this rainy east coast time and we hope all of you are safe and dry and that’s the end of this conference call.


The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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