Gladstone Capital Corporation (GLAD) Q1 2015 Earnings Report, Transcript and Summary

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, www.gladstonecapital.com and the SEC's website, www.sec.gov. An audio presentation of this call is also available on our website. We would like all of you to visit us for our 2015 Annual Stockholders Meeting, which will occur on Thursday, February 12, 2015 at 11 A.M. Eastern Standard Time at the Hilton McLean Tysons Corner, which is located at 7920 Jones Branch Drive in McLean, Virginia. Now if you are not coming to the annual meeting or even if you are, please vote your shares using from your proxy, so you get the votes in. There are four ways you can vote before the meeting. Number one, by mailing in the proxy card that you received. Number two, calling 800-690-6903. If you do call that number to vote, you are going to need your proxy card with the proxy control number on it to give it to the operator. You could also vote by going to www.proxyvote.com and voting on the Internet, you will also be asked to provide the control number there as well. You can also call your broker firm where you hold your shares and they will help you get your vote in. And now we will begin our presentation today by hearing from Gladstone capital's President, Bob Marcotte.

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 the quarter. The four proprietary deals closed in the quarter were mostly private equity sponsored and restructured as modestly leveraged unitranche facilities. The average leverage for these deals was 3.5 turns and the weighted average expected yield on these transactions is 10.8%. The details include a $15 million senior term debt and equity investment in Circuitronics, which is a premier electronic manufacturing services company focused on the design and production of specialized printed circuit board assemblies and related services for industrial applications. There was $11 million senior debt investment in Vision Government Solutions, which is a leading provider of land parcel management software and appraisal services to local government organizations. We participated with our affiliated fund, Gladstone Investment in making an $8.4 million senior term debt and equity coinvestment in B+T holdings, which is a full-service provider of structural engineering, construction and technical services to the wireless tower industry. And lastly, we made $11.1 million follow-on senior debt investment in support of WadeCo, strategic acquisition of another chemical distribution company servicing the production driven chemical needs of the independent oil producer market. Additionally, we had $2.4 million of follow-on investments in existing portfolio companies and closed $16.5 million of syndicated investments during the quarter. With respect to the repayments, we had two deals that we discussed in our last call, which paid off during the quarter, North American Aircraft Services paid off, resulting in a realized gain of $1.6 million and a success fee of $0.6 million for an internal rate of return of 18%. We also exited Midwest Metal Distribution for net proceeds of $6.1 million, which resulted in a realized loss of $14.5 million. While we are disappointed in this latter outcome, the continuing CapEx requirements, the commodity driven price swings of the business and the lack of a competitive scale of the business did not fit our long-term portfolio investment objectives. Our net investment growth in the quarter resulted in a 16.3% increase in fair value of our investment portfolio compared to the prior quarter end. We expect this positive investment momentum to continue into the current quarter with two deals already in the process of closing. In terms of portfolio quality, on the whole, the fair value of the portfolio was up on the quarter, rising to $326.6 million, or 84.6% of cost as of December 31, 2014, compared to 80.5% of cost at September 30, 2014. The net unrealized appreciation for the quarter ended December totaled $4.6 million excluding the reversal of $13.4 million of unrealized net depreciation related to the two exits outlined earlier. Material valuation moves included increases with a very strong operating performance at Defiance and Funko, which totaled $5 million. However, negative swings were driven by two troubled credits, GFRC and Saunders, which dropped $3 million and 1.5 million, respectively. In addition, the year-end sell-off in the syndicated loan market accounted for $2.9 million of the valuation depreciation. And lastly, there was $1.8 million of unrealized depreciation for the quarter associated with our oil and gas related investments, as determined largely based on our external third-party valuations provider. With respect to our oil and gas exposure, while it might be slightly larger than some of the other BDCs at $55.2 million or 16.9% of our portfolio at fair value, we consider it to be very conservatively constructed, considering 61% of the exposures are related to downstream services which are not directly impacted by crude prices. In addition, the weighted average leverage on the portfolio is only 2.6 turns of EBITDA and the average interest coverage is just under eight times the interest applicable to its underlying business, which provides ample cushion to absorb any margin or volume pressures that maybe experienced by these companies. Despite some successes on the quarter, our nonaccrual investments and underperforming assets are still higher than we consider acceptable. This quarter we were able to exit our nonaccrual investment in the Midwest Metals generating $6.1 million of net proceeds. We have stepped up our posture related to the exit of a number of our remaining older vintage assets and should have some additional exits to discuss in the near future. As we have reported in the past, our investment in Sunshine Media Holdings continues to improve. With the recent award of a major media contract, the company has generated sufficient liquidity and ongoing cash flow that we anticipated reinstituting interest accrual on a portion of our position in the current quarter. Heartland Communications, a small radio broadcaster was placed on nonaccrual in the March 2014 quarter. However, following a strong summer operating period, Heartland has managed to stay current on all interest obligations and we are working on a combination of asset sales and refinancing to achieve an exit for this underperforming assets. Sunshine Media and Heartland have a combined debt cost of $33.6 million or 9.4% of the cost basis of all debt investments in the portfolio and a combined fair value of $8.3 million or 2.8% of the fair value of all debt investments in the portfolio as of December 31. We expect this metric to improve significantly with the aforementioned reclassification of a portion of the Sunshine Media exposure. We have had some successes in turning around or exiting several of our nonaccrual investments and more challenge credits in the last year with favorable results. However, this does not mean we can do it again or that we will not place other companies on nonaccrual in the future. Moving over to our portfolio income profile. 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 December 31, which excludes any success fee income, any reserves on interest receivables. Generally our floating rate investments have LIBOR floors and the weighted average floor on our variable rate loans was 1.9%, while the weighted average margin is 9.1% as of December 31. Our proprietary loans totaling 80% of portfolio cost had a weighted average all-in rate of 11.1% while our syndicated loans roughly 20% of the total portfolio at cost had a weighted average all-in rate of 10.5%. Our other income is significant at times over the last several quarters, which is primarily due to what we call success fees, which are fees generally due on change of control of the company and are recorded when received in cash. We received over $880,000 in success fees during the three months ended December 31, which is up from the prior quarter. As of December 31, the off-balance sheet success fee receivables totaled $10.8 million or about $0.51 per common share, if the payment would be triggered. Due to the contingent nature, there are no guarantees that we will be able to collect any of these success fees and they are excluded from our reported yields. Our total other income remained consistent quarter-over-quarter at $1.1 million or 12% of the total investment income of the portfolio. We expect other income in the next few quarters to be consistent with the level recorded this quarter. Net investment income was down $719,000 quarter-over-quarter as new investments were added towards the end of the quarter and as a result of the decrease in the voluntary incentive fee credit of $719,000. The decline in the incentive fee credit is a result of the adviser's voluntary election to determine the incentive fee credit on an annual basis at the end of the year rather than quarterly as done previously. Our fund has experienced significant income swings on investment exits or other income in the absence of a fee clawback feature, the quarterly credit determination is expected to generate greater than 100% coverage of the common distributions over the course of the year, as it did in fiscal 2014. The adviser remains committed to providing a credit of the incentive fee to achieve net investment income sufficient to cover 100% of the common distributions to shareholders as measured over the course of the year. With respect to the investment climate, the backlog of loan opportunities and outlook. The investment climate in which we operate, the middle-market environment is particularly active. Transaction volumes for 2014 were very healthy and all indications are that 2015 is setting up much the same. We are seeing a proliferation of smaller newly formed private equity funds looking to make growth investments and an increased emphasis on buildup in growth investment strategies. These trends are well-suited to our value proposition and focused on delivering senior and unitranche financing solutions to this marketplace. From a liquidity perspective, going the 2015, the competitive dynamics for middle market loans appears to have shifted and maybe tightening as a result of several factors. The cumulative impact of regulatory pressures on leverage lending by the banks, the outflow from the leverage loan from the second half of 2014, which triggered the sell off in the broadly syndicated market at the end of the year and the decline in the BDC stock prices to the point where many are trading below NAV may have lessened than the competitive pressure to book middle market loans. Consequently the downward pressure on investment yields appears to have abated and the more difficult higher leverage credits may be more difficult to get done. Competition continues to be most pronounced in the larger end of the middle-market with EBITDA of greater than $10 million where the commercial banks and the broadest array of non-bank lenders operate. In the face of this competitive profile, our strategy is to continue to leverage our long-standing reputation in the lower end of the middle market and investor oriented financing approach is gaining traction as demonstrated last quarter. We intend to continue to refine our coverage of the private equity sponsor community and expect to be able to continue to source attractively priced unitranche financing solution in the lower middle market. Our continuing priorities for the fiscal year ended September 30, 2015 will be manage our more challenging credits in the portfolio to an orderly liquidity where possible. In addition, we are working to expand investment capacity to support future portfolio growth by expanding our available credit facilities, monetizing select syndicated or lower yielding senior loans positions, to support asset and income growth of the coming quarters to enhance the bottomline for the benefit of shareholders. Now let's hear from our Chief Financial Officer, Melissa Morrison, who will provide a report on the fund for quarterly and year-end financial.

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 mark investments to fair value on our statement of assets and liabilities and represents the change in fair value quarter-over-quarter in our statement of operations. This is a non-cash event. During the quarter ended December 31, 2014, the majority of the $12.9 million of net realized losses we recorded were related to the exit of Midwest Metal during the quarter for lower cost basis and at approximately 93% of the fair value as of the end at the prior quarter. For the quarter ended December 31, we recorded net unrealized depreciation, excluding reversals of $4.6 million on investments. Over our entire portfolio, excluding reversals, the net unrealized depreciation for the three months ended December 31 consisted of approximately $9.8 million of depreciation on our debt investments and $5.2 million of appreciation on our equity investments. Our cumulative net unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders. However, it may be an indication of future realized losses which could ultimately reduce our income available for distribution to stockholders. Most of the older vintage investments in our portfolio and the industries they serve were severely impacted by the recession and in many cases they have not recovered. Approximately 82% of the $59.2 million in cumulative unrealized depreciation on our balance sheet relates to portfolio companies originated prior to 2008. 70% of the total cost basis of our portfolio is from investments that originated in the last seven years and as of December 31 those assets are valued at approximately 97% of their cost basis. We believe this vintage analysis of our investment portfolio reflects a marked distinction in the valuation of those assets originated ever the last seven years. On our statement of assets and liabilities, as of December 31, we had approximately $344 million in total assets consisting of $327 million in investments at fair value and $18 million in cash and other assets. Liabilities totaled approximately $148 million consisting of $83.5 million in borrowings at cost on our line of credit, $61 million in term preferred stock and $3.5 million in other liabilities. We are actively looking at other capital raising opportunities in the future as well as working on an amendment and extension of our current credit facility to lower our cost of capital and more closely match the duration of our investment. Overall, our net asset value decreased quarter-over-quarter due to an increase in the accumulative unrealized depreciation from the exit. Net asset value decreased from $200 million or $9.51 per share as of September 30, 2014 to $196 million, or $9.31 per share as of December 31, 2014. From an available capital perspective, as of today assuming we continue to drop to fund eligible investments, we have about $37 million in aggregate cash and availability on our $137 million credit facility to fund additional investments. We are in the process exiting certain investment positions and may consider monetizing a portion of our syndicated loans and select lower return senior loan positions to support new originations in addition to actively looking at new sources of capital. Management is currently assessing all of these options. In summary, we believe our balance sheet is conservative as BDC rules for restrict leverage to one-to-one debt to equity. For our portfolio statistics, currently our portfolio is adding 92% to 8% allocation of debt-to-equity at cost with 54% of the portfolio invested in senior debt and 38% in senior subordinated debt. We ended the December 31 quarter with 49 companies in the portfolio, which is up from 45 at the prior quarter-end. Our portfolio continues to be highly diversified by industry with 19 different industries and by geographic region. We continue to avoid industries in the housing, banking, high technology and venture capital, commodity products or highly cyclical industries. We are currently at 84% to 16% variable to fixed rate allocation in our portfolio. Generally, our variable rate loans have a minimum rate or floor, so when rates begin to increase we should see higher income. In summary, we had a total of $61 million in new and follow-on investments during our first quarter of fiscal 2015. We maintained our portfolio yield and we also made tangible progress on addressing some of our challenged credits. Our focus is on making prudent investments which provide accretive returns to our shareholders and support our commitment to maintain our long-standing track record of shareholder distributions. And now turn the call back over to David.

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. This recession has been much longer and much deeper than any of the four I have experienced in the past. But we seem to be getting through all of those and every time we exit one of those old transactions, we use the cash that we get to invest in new deals, get stronger and have more income. Lastly access the long-term capital is always a top priority for us. We utilize our current credit facility, of course and we look to raise additional long-term debt and equity capital as needed. Recent economic indicators appear to be moving in the right direction. It's just so very slow as they go forward. This is been the slowest recovery I have ever experienced and we continue to monitor a few of our concerns in the economy. Obviously, the volatility of oil and gas industry, which could impact many businesses that we have invested in and things that we are looking at. Just never know where that's going. Obviously, the low prices today are a big boost to almost every business out there. Uncertainty around the timing of the Federal Reserve's increase in interest rates. Most of our loans are variable rate. So if rates go up, the interest paid on our loans will go up too. I think this is going to be very good for us if it goes up. Unfortunately, it's not good for businesses that have to pay more in interest rates. The fiscal crisis and the federal government is still top of mind and everything we look at right now, about $18 trillion and continue to climb as the government spending is really just off the charts. It's unsustainable. The government has more than $70 trillion in promises, such as Social Security and all the citizens of this country in the form of welfare and other promises like Social Security. So we will just have to -- I don't know how we muddle through that, but it's going to be very difficult. Geopolitical tensions around the world continue to impact the U.S. marketplace and the stock market, in particular. Many of private companies like the ones we invest in feel that there is far too much regulation out there around healthcare, financial markets, energy, the environment. It's really hindering their performance and expansion of job growth. In fact, there are fewer small businesses today than there were during the Jimmy Carter presidential time. The government seems to be destroying some of the small businesses with all the regulations that are out there. Despite the economic issues, we feel it will continue to be a great time to invest in small growing middle market businesses. Small businesses are important part of the economy and the primary driver for economic growth and job creation in the United States and Gladstone Capital has demonstrated an ability to withstand economic cycles and produce consistent returns for our shareholders. January 2015, our Board of Directors declared monthly distributions to our common stockholders of $0.07 per common share and the regular distribution on our preferred shares for the January, February and March 2015 months during the quarter. The Board will meet again in April to consider the vote on the monthly distributions of April, May and June for 2015. Through the date of this call, we have made about 144 sequential monthly or quarterly cash distributions to our common shareholders and we have never missed the distribution. At the current distribution rate, our common stock, with a common stock price at $7.54 yesterday, the distribution run rate is about 11.1%. By the way, if you look that up on Yahoo for some reason, it's still quoting at a lower rate, but it is 11.1% today. The BDC industry median distribution rate runs about 10.1% according to the statistics. So we see this stock has traded down and the yield has gone up. So it's a great time to buy the stock. Monthly distribution of 6.75% on newly issue preferred stock. That translates into a little over $0.14 a month or $1.69 annually. Term preferred stock closed market price yesterday of about $25.64, up from the original price of $25 on NASDAQ under the ticker symbol GLADO, which gives a yield of almost 7%. So please mark your calendars. We would love to have you come to our annual meeting of stockholders on Thursday, February 12 at 11 A.M. Eastern Standard Time in the Hilton McLean Tysons Corner at the7920 Jones Branch Drive in McLean. We would love to see you there. We would like to see you vote your shares. And if you are not coming to the meeting or even if you are, vote your shares by using your proxy. You can get the votes four different ways, mail in that proxy card, call 800-690-6903. If you call, you do need your proxy card number. You can go to proxyvote.com and vote online and you will need your proxy card again there. And you can also call your broker. They can certainly help you vote. So in summary, this quarter was a good report. Strong origination volume. Continue to move forward with exiting some of the challenged companies that we have and taking the cash and putting it into new investments. And we will continue the origination growth in the second quarter of 2015. So now we will have the operator come on and we will take some questions from all of those good followers of our common stock out in the marketplace. Andrew?

[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.