Good day, ladies and gentlemen and welcome to the Gladstone Capital shareholders' call for the quarter ending December 31, 2014. At this time, all participant lines are in a listen-only mode to reduce background noise, but later we will be conducting a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to your host for today, David Gladstone. Sir, you have the floor.

All right. Thank you, Andrew, for that nice introduction and good morning everyone. This is David Gladstone, Chairman. This is the quarterly earnings conference call for shareholders and the analysts that follow Gladstone Capital. The common stock is traded on the symbol GLAD and the preferred stock is traded under the symbol GLADO. Thank you all for calling in. We are always happy to talk to our shareholders and the analysts. Wish we could do this more often. We like giving updates on our company, our portfolio and the business environment and as always, you have an open invitation to stop by our offices here in McLean, Virginia, outside of Washington D.C. Please stop by if you are in the area and say hello. Our team is about 60 people now and we have some of the finest in the business. Now, we will hear from our General Counsel and Secretary. He is also President of our Administrator, Michael LiCalsi. He will make a statement regarding forward-looking statements and some other items. Michael?

Good morning, everyone. This conference call may include 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 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 www.gladstonecapital.com or the SEC's website at www.sec.gov. 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. And please also 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 could also find us on Facebook, keyword, The Gladstone Company and follow us on Twitter at GladstoneComps. I hope our listeners will read our press release issued yesterday and also review our Form 10-Q for our first fiscal quarter ended December 31, 2014, which we also filed yesterday with the SEC. You can access the press release and our 10-Q on our website,…

Good morning, everyone. As many of you know, Gladstone Capital is the lending fund of the Gladstone Companies. We provide cash flow based loans to privately held U.S. based businesses in the lower middle market, which we define as $20 million to $100 million dollars of revenue and $3 million to $15 million in earnings before interest, taxes and depreciation. Our loans are used to fund private equity buyouts, make acquisitions, meet growth capital needs and to recapitalize and refinance existing capital structure. Gladstone Capital was one of the first BDCs focused on lending to the lower middle market, established in 2001 and today that dedication, experience and consistency are a core part of our value proposition. We approach the market with an equity perspective and strive to deliver market oriented capital solutions to support each business's unique capital and growth profile. The majority of our loans today are businesses backed by private equity sponsors and include a combination of senior or subordinated loans and may include an equity coinvestment. We target to make investments of $8 million to $20 million, but will consider smaller positions in broadly syndicated loans from time to time. With that introduction, let's review how the strategy is working and our results for the December 31 quarter and our outlook the markets in which we operate. We are pleased to report that for our first fiscal quarter of 2015, ended December 31, we experienced a nice pickup in deal flow, which resulted in a record level of investment originations for the fund. New proprietary deals, follow-on investments and attractive broadly syndicated opportunities combined to generate $61.5 million of originations for the quarter. In addition, we received $4.5 million during the quarter in scheduled and unscheduled repayments, resulting in net investment activity of $57 million on…

Thank you, Bob and good morning. I will review GLAD's financial results and overall portfolio statistics for the first fiscal quarter end. Starting with the statement of operations. For our first fiscal quarter of 2015, ended December 31, 2014, net investment income was $3.7 million or $0.18 per share, which is a decrease of 16.3% when compared to the prior quarter of $4.4 million or $0.21 per share. Interest income on our debt investments remained the same, quarter-over-quarter, at $7.6 million due to reserves placed on interest receivables for certain portfolio companies and the fact that the new assets funded this quarter were later in December. In addition, other income remained the same at $1.1 million during both quarters and primarily consisted of success fee income. We generally do not recognized success fees in our income statement until we receive them in cash. The primary increase in operating expenses, quarter-over-quarter, was the incentive fee credit booked last quarter and not this quarter. As Bob outlined earlier, we will begin at assessing the incentive fee credit on an annual basis, while the adviser plans to remain committed to sustaining shareholder returns and ensuring that distributions to stockholders are covered by net investment income as it has over the last several years. To note, we did receive interest and dividend payments of ever $760,000 during our December 2014 quarter-end. However, similar to last quarter and according to GAAP, our nonaccrual policy, these receipts were not recognized on the income statement but as a cost basis reduction. 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. Unrealized appreciation or depreciation on our portfolio is when we…

All right. Now Melissa, Bob, Michael, those were good reports. For the quarter ending December 31, 2014, Gladstone Capital had strong origination quarter with $31 million in three new proprietary deals, $12.5 million in syndicated deals and $13 million in follow-on in existing proprietary companies and much of this came on the books at the end of the quarter. So it didn't have much impact on the quarterly income for December 31, but it should show up very nicely in the March quarter. And we exited two deals. One, we had again on that one and one was a nonaccrual where we are able to get back about $6.1 million of our cash and put that to work generating income. In addition, subsequent to the December 31 quarter-end we hope to close several new and follow-on deals which would be great start for production for our new investments on the March 31 quarter. New originations the is our main focus, obviously and many borrowers are looking to take advantage of capital availability. Rates are actively shopped but most of the small businesses, especially the smart ones are not looking just fro low rates, they also look for partner that can help them succeed and this is where we excel. All of our business experience and all of our people here have a strong relationship with our portfolio companies and we have other financial sources that we bring to the table. So it's a powerful package that we bring to each of these small businesses. In addition, we continue to make our existing portfolio stronger. We are exiting some of those who have not shown progress. Most of those are really old investments that should have been sold and written off years ago. I take credit for that one. Guessed wrong.…

[Operator Instructions]. And I do have a question from the line of Troy Ward from KBW. Your line is open, sir.

Hello, Troy.

Pardon me. It looks like the line of Bob Brown has been placed through the podium.

I know you are putting money to work in terms of new investments for shareholder value, but with the stock price so low, is there any chance of looking at actually using some of that money to simply buy back shares?

Probably not. We are on a plan to get rid of our old deals that are holding us back and hopefully get to a point where we can increase the dividend. We are all about dividends and growth and I am not sure of buying back shares. I have watched a couple of the BDCs buy back shares hadn't done much for them. I think we somehow have been thrown to the wolves and I think if you watch us during the next couple of quarters, you will see us come back very strong.

Do you think there is reasonable chance, assuming we can continue to execute as we are doing that we make a dividend increase at some point this year?

Hard to say. I can't really project that at this point in time, simply because I don't know how many deals we have put on the books. It's really a variable that is undefinable in terms of projections. We put the projections down. We show it to the Board every quarter and really just trying to figure out how many deals you are going to close is excruciatingly difficult and each deal has a great impact on the company. So trying to make that guess is very difficult but that's certainly our goal.

Just to add to that, Bob, the two variables, I think, that we also consider are, we have some large exits that we are working on, particularly around some of the older legacy assets.

Right.

And until those clear, I think it's a little bit premature to move in that front. The second, which I would say is positive, is the downward pressure in yields abating puts us in a much better position to stabilize and potentially grow. The combination of adjusting our credit availability and resetting some of our aligned cost as well as stabilization in the end market for yields will set us much better. Obviously, that is only in the last couple of month or two we have seen that trend. So if that continues over 2015, I think that's a much more opportunistic ability to move in that direction.

Okay. Thank you.

Okay. Next question.

Thank you. Our next question is from the line of Troy Ward from KBW. Your line is open, sir.

Great. Thank you. David, one of the things for the December quarter, the originations were a lot harder than we have seen in several years, which is definitely a pleasant surprise as you have found some higher yields and to fund that, you took leverage higher. So a couple of questions regarding that activity. We were a bit surprised to see that the yield on the syndicated assets were actually higher than the proprietary deals. Can you speak to us a second about that? And then also you are currently, I think, at about 0.75 debt-to-equity. Are you comfortable running at that level? Or do you think it will drift a little bit lower of may be even a little bit higher?

That's all back to Troy. The same old question is that how many deals you are going to close. We are comfortable where we are today. We have good bankers. They don't seem to be like the foreign bankers, Deutsche Bank, was before. So we are comfortable with that. But Bob, you want to speak to that?

Let me speak to the yields. I think there is a definitely in the yields and you picked up on obviously an interesting fact. I think as I outlined the average leverage on the proprietary deals, it was 3.5 turns and they were a number well south of that. And when we are generating expected returns 1.25%, they may not sound as attractive as historical yields, but we are talking from dollar-one. So we unitranche dollar-one to 3.5 turns of leverage. You go into the syndicated loan marketplace, many of those our second lien. Leverage is typically five to six. So you are talking about an order of leverage that's probably a turn-and-a-half or more higher and so the relative risk reward we found to be very attractive for having dollar-one risk it at maybe a slightly lower rate. So today that's a nice trade-off to have. It also because they are unitranches, puts us in a position that we have liquidity, should we choose to sell them at first loss or a piece of that paper at very attractive rates and end up with a second lien not only with substantially higher yield but lower inflection point on leverage. So it gives us many more options and we felt it's an attractive trade-off in the current marketplace. In terms of leverage, I think the banks are much more comfortable having first dollar risk on unitranche paper as at the senior secured asset rather than continuing to press on the yield side for second lien assets, which is typically coming through unsubordinated side. So I think if you were to look at our service metrics and our percentages, our percentage of senior assets have gone up in the last quarter, which frankly makes us more confident and comfortable as all the banks that we are improving the average asset quality of our portfolio.

That's great color. Thanks, Bob. David, can you speak, you guys are, probably it will actually go back to you, Bob, but on the energy portfolio, you are one of the first to report on the December quarter, of course and just can you talk, I know 64% of your assets are downstream, so you feel a lot of comfort there, but can you talk about the conversation that's going on with the exposure in the energy sector about maybe their changes in their capital expectations for 2015? Maybe there is change in their use or price paid for oilfield service? Just give us some color of what you are hearing, because obviously that's a very topical capital conversation.

Sure. Obviously we put on some assets in the fourth quarter in the face of some of the challenges and notoriety media attention to the sector. The one that was added and which was described as WadeCo was a follow-on acquisition. WadeCo is, I think we have described when we booked the asset originally, is a chemical distribution company. They are serving the Permian and Eagle Ford basins in Texas. Chemicals represent somewhere between $1 and $2 of the lifting costs associated with getting oil out of the ground. The ability to continue to lift those resources is critical. A critical component is the chemicals that are necessary to deal with the bacteria, the rust inhibitors, the scaling and some of the other attributes of the fracing production process. When you add that very small dollar amounts to the actual cost of lifting in those basins, it's extraordinarily well. We have looked at breakeven analysis for existing fields in Texas and it's in the low-20s in most instances. So we feel that as long as fracing is a technology that's accepted and it continues to be perfected, that the chemical element that's required to produce is absolutely required and will continue to be demanded. In fact, the well counts for this business are increasing. The strategic acquisition that they made in the last quarter, the combination of the businesses has more than doubles the EBITDA and in fact, in this company it's higher than our typical average and well north of where we started. So the feeling is, we are very really betting on the technology and we are in a very low price point in the continued deployment of that technology and the service. Some of the other exposures we have in our energy portfolio includes one that does maintenance on refineries. PSE is the largest contract maintenance outfit in the refinery business. If crude is going up, there is going to be a heck of a lot more crude running through refineries. Refinery capacity has been extraordinarily tight and the downtime will be absolutely something that they cannot stand. So maintenance spending and regulatory requirements continue to be a very active participant in the infrastructure. I can continue on, but we are playing in the downstream. We are playing in the renewed capacities that the U.S. has produced in the marketplace that are going to be demanded and it has nothing to do frankly with the wellhead stock price for oil and gas today. So right now, all of our companies, not only are relatively under leveraged, but they huge coverage and cash flow flexibility. LTM interest coverage of eight times, as you can appreciate, is a very, very robust level for any kind of small business to absorb any disruptions or timing issues that may come about in customer ships or temporary disruptions in the business.

That's very good color. Thank you. And then David, one final question for you. I know in your upcoming proxy, you are asking shareholders for the permission to sell below book value, but currently you are obviously selling something right around 0.8 of book. Can you just provide some color around why you ask for that? And again, this isn't just you. This is across the space and I think know some of those answers and they are very good answers, but can you just provide some commentary around why BDC managers ask for the ability to sell below book value, even though you probably have zero idea that you ever want to issue shares down at this level, but can you provide some color around that?

Sure. I think I don't want to speak for the industry. I will speak for ourselves. And that's one extreme pain. We did two rights offerings back in the day, when we were desperate for money because the leverage had gone up and assets had gone down and so as a result we felt the need to raise some equity. We did it and of course the shorts come into the stock and drive it down and it's just usually a disaster. So the only alternative to that is to have the ability, since business development companies can't offer stock without shareholders' approve, other than through a rights offering. And the only way to do that is to get them to sign off in the proxy. And we go through that. I don't know how many years we have done that. I know we have done one offering in GAIN some, what was it, a year, two years ago? Two years ago in which we ran up against one-to-one coverage and just needed to raise some equity. It wasn't much of a discount. So I would say that we are going to do it when we have to. I don't have any reason, just tell you right now we are going to do it tomorrow, but at some point in time, we will need to raise equity and I hope that our stock has come back to a reasonable level, so that we are not, as you know, I am still probably the largest shareholder of this company. So as a result, I am diluting myself every time I do this as a result. I would like to not ever do it, but there may be that moment in time when we need to do it. Other questions?

Yes. One final one is, we have heard before that it actually helps. I know you are going to be renegotiating your credit facility in the near-term. Does it help your renegotiation of that facility to be able to tell the credit facility provider that you at least have the ability, in a worst-case scenario, to raise equity? Or is that not really an issue in negotiations?

I think they are most often looking at the collateral and the cash flow. I don't know that they look at that credit facility. I know they, because we have the same lenders that we had back then, with the exception of the infamous Deutsche Bank, they rode us through that last downturn and one of the things they were very happy that we had is something that was liquid that we could sell and pay down Deutsche Bank. As you know, we had to sell off, I don't know what it was, $35 million, $40 million and pay back Deutsche Bank. We have some of that now. It's not nearly as attractive today as it was back then to do second liens and even first liens, because it's become a very hot marketplace today. The good news is, there are plenty buyers and so you do have liquidity. It's just that everything is not very good for building that side of the balance sheet. And I think over time, we will probably reduce our ability in that area simply because the returns are just not as good and the risk reward ratios are not very good. So other questions, Troy?

Let me add on that, Troy, just for color. Having that flexibility, as we look at the long-term projections and resetting our lines, clearly were beginning to change the origination momentum of the business. And so over time as we think about flexibility and growth of the asset base, the debt facilities linked with the equity capacities and momentum and obviously as we grow, we are going to get to a point where that's going to become a constraining factor. We are obviously using a variety of other means to source capital to continue to reinvest, but we will need, in the future, if we continue on the track that we are and the momentum that we are building, we will need to get to the equity markets eventually.

Great. Thanks, guys.

Okay. Next question please.

[Operator Instructions].

All right, Andrew, it sounds like we don't have any more questions.

There are no questions in the queue, sir.

So we look forward and do a good job for our shareholders and talk to you again next quarter. That's the end of this call.

Ladies and gentlemen, thank you for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines. Everyone have a great day.