Gladstone Capital Corporation (GLAD) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Gladstone Capital Corporation's Second Quarter Ended March 31, 2015, Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to turn the conference to our host, Mr. David Gladstone. Sir, you may begin.

All right. Thank you, Eric, and nice introduction. Good morning, everybody. This is David Gladstone, Chairman, and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Capital. Common stock trading symbol is GLAD, and we do have some preferred stock trading under the symbol GLADO with O onto it. Thank you, all, for calling in. We're always happy to talk to our shareholders and analysts and wish we could do this more often. We would like to giving you updates on our company our portfolio and our business environment. As always, you have an open invitation to stop by our office here in McLean, Virginia, just outside Washington D.C. Please stop by and say hello. Our team is here. And most of the people, about 60 or so, are here and I think they are finest in the business. So we'll start off our with General Counsel and Secretary, Michael LiCalsi. He is also President of our Administrator, and he'll make a statement regarding forward-looking statements. 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 Form 10-K filing and our registration statements filed with the SEC, all of which can be found on our website at gladstonecapital.com or the SEC’s website at 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 for market information is not a guarantee of future results. Please take the opportunity to visit our website and sign up for our e-mail notification service. We don’t send any junk mails, just timely news on all of our companies. You could also find us on Facebook, keyword: The Gladstone Companies, 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 second fiscal quarter ended March 31, 2015, again, filed yesterday with the SEC. You can access the press release and 10-Q on our website, www.gladstonecapital.com, and SEC’s website, www.sec.gov. An audio presentation of this call is also available on our website. And now we will begin 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 having $20 million to $100 million in revenues 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 or to recapitalize or refinance an existing capital structure. Gladstone capital was one of the first BDCs focused on lending to the lower middle market, established 2001, and today that dedication, experience and consistency are core part of our value proposition. We approach the market with an investor perspective and strive to deliver market-oriented capital solutions to support each business' unique capital and growth profile. The majority of our loans today are the businesses backed by private equity sponsors and include a combination of secured first- and second-lien loans and may include an equity co-investment. We target to make investments of $8 million to $20 million, but will opportunistically consider smaller positions in broadly syndicated loans from time to time. With that introduction, let's review our results for March 31st quarter and our outlook for the markets in which we operate. Regarding investment activity, we are pleased to report that for our second fiscal quarter ending March 31, 2015, despite the usual low in new deal activity in the first quarter of the calendar year, we closed one proprietary deal and some follow-on investments, totaling $31 million of fundings for the quarter. Additionally, we experienced minimal repayments during the quarter, so the new investments translate into net portfolio growth of $30.5 million or 7.9%. The new proprietary deal closed during the quarter was for Precision Metal Hose, a manufacturer of flexible metal and composite hoses used in a variety of industrial applications or supplied to OEM manufacturers serving the aerospace, defense, power generation, general industrial and oil and gas industries. The financing included a $21 million of secured first-lien loan and a small equity co-investment and an unfunded working capital line of $4 million. The financing was in support of the acquisition of the company by a local private equity sponsor, which represented GLAD's first deal with this sponsor. The closing leverage of the deal was a modest 3.5 turns of leverage and the deal yields 9.3%. Additionally, we had $9.7 million of follow-on investments in existing portfolio companies during the quarter, including a $6.6 million advance to Lignetics to fund an acquisition which enhances the company's market coverage and economies of scale. With respect to the portfolio overview and performance. In the past 2 quarters, the cumulative effect of our focus on secured first-lien investments has begun to impact our portfolio mix and results. And for a greater details, we'd recommend you review our updated investment portfolio disclosures in our recently released 10-Q. The highlights of the portfolio show that 91% of our investments in the last 2 quarters were lower-leveraged first-lien unitranche transactions. As a result, our first-lien investments have risen almost 10 points from 46.6% of our debt investments to 56.1% of total debt investments at fair value. The balance of our debt portfolio was second-lien investments, including a combination of proprietary and syndicated second-lien loans, as we do not have any unsecured subordinated debt exposures. The consequence of this asset mix shift has a number of implications, and we will touch on them over the balance of this call. On the whole, the fair value of existing portfolio increased by $6.5 million on the quarter, as unrealized appreciation of $14.1 million exceeded unrealized depreciation of $7.6 million. The largest 3 drivers of the unrealized appreciation for the quarter represented 74% of the increase and included the $6 million appreciation of our equity position in Funko, a toy company that provides pop-culture collectibles, pursuant to licenses, which is continuing up to a very strong operating performance. Other notable valuation improvements included: Precision Acquisition Group, which was up $2.3 million and is benefiting from the recovery in aluminum production; and Sunburst Media, which we're hopeful to make an opportunistic upcoming sale of the underperforming radio station, which was up $2.1 million of appreciation this quarter. Partially offsetting these movements, unrealized depreciation included $2.5 million associated with the rapid performance deterioration and in sewing restructuring of our syndicated second-lien position in PLATO learning, which was reduced to 35% of cost. In addition, the continued underperformance of GFRC, the commercial buildings products manufacturer, represented a decline of $1.8 million, and $1.1 million of depreciation was associated with the external valuation of our oil and gas investment positions. With respect to our oil and gas exposure, there were no material changes on the quarter. The industry exposure represents $51.7 million or 14.2% of our portfolio at fair value and continues to perform well. To recap our sector exposure: 59% of the exposure was related to downstream services, which are not directly impacted by crude prices; the debt positions are conservatively leveraged with weighted average leverage of only 2.6x EBITDA and average fixed charge coverage of 3.4x. All companies are covenant compliant, have ample liquidity to absorb any margin or volume pressures and are backed by strong and experienced private equity sponsors. Cumulative unrealized depreciation associated with our oil and gas loan portfolio totaled $3.4 million as of March 31, and the fair value represents 93.5% of cost. On the whole, the cumulative net unrealized depreciation of investments declined to $52.7 million for the quarter ending March 31st. And this improvement represented the bulk of the increase in NAV from $9.31 to $9.55 for the quarter. Despite some successes on the quarter, our nonaccrual investments and underperforming assets are still higher than we consider acceptable. This quarter, we added GFRC as a nonaccrual investment, as operational issues have continued to undermine the company's financial performance. The fair value of the GFRC investment was reduced to $2.2 million this quarter, and we exercised our creditor rights and have taken control, hired a CRO, who has stabilized the operations, and we are assessing our exit options. With respect to one of our larger challenge credits, Sunshine Media Holdings, the company's improved profitability and liquidity supported our moving certain tranches of our investment to accrual status beginning this quarter. As of March 31, 2015, our combined nonaccrual debt cost basis is $39.2 million or 10.2% of the cost base of all debt investments in the portfolio and has a combined fair value of $9.2 million or 2.8% of the fair value of all debt investments. We are currently working to exit a number of our legacy underperforming assets, and while we cannot discuss specifics, we are working -- we are looking forward to be able to update you in the near future. That said, while we have had some successes in turning around or exiting several of our nonaccruals and more challenge credits in the past year, with favorable results, this does not mean that we can do it again or that we'll not place other companies in nonaccrual in the future. With respect to our portfolio yields, moving over to our portfolio income profile, the weighted average yield on interest-bearing debt investments, excluding reserves, in our portfolio was 11.3% as of March 31, 2015, which was down from 11.5% as of September 2014. This drop is directly related to the cumulative effect of the increase in lower-leveraged, secured first-lien investments funded by increased draws under our credit facility. For the quarter, investment income was up 14.3% or $1.1 million compared to the prior quarter and compared to the increase in interest expense of $346,000. Our debt portfolio was well positioned for any interest rate increase, with 85% of the portfolio in floating rate investments and 15% in fixed rate investments. Our floating rate investments typically have a minimum or LIBOR floor, and the weighted average floor in our variable rate loans was 1.9%. While the weighted average margin is 9% as of March 31, 2015, our proprietary loans totaling 82% of the total portfolio cost had a weighted average yield of 11.3%, while our syndicates totaling 18% of the total portfolio cost had a weighted average yield of 11.1%. Our other income has been significant at times over the last several quarters, which is primarily due to what we call success fees, which are fees generally due upon the change of control of the company are recorded when received in cash. We received over $500,000 in success fees during the 3 months ended March 31, 2015, which is down from the prior quarter ended December, which totaled $880,000. We track our success fees off balance sheet due to their highly contingent nature, and as of March 31, 2015, the off-balance sheet success fee receivables totaled $11.4 million or about 54% -- $0.54 per common share. In total, other income was down $595,000 versus the prior quarter and offset much of the increased interest spread generated by the higher average asset levels. In addition to what we believe to be the favorable risk return profile of a recently originated secured first-lien unitranche investment, this asset shift is also -- was made in anticipation of the amendment and extension of our credit facility. The revised facility, which is closed and was announced earlier this week, will both reduce our borrowing costs by 50 basis points across the board as well as increase the advance rates against our secured first-lien assets, thus significantly improving our return on equity on these assets. With respect to the investment climate backlog of loan opportunities and outlook. While new transaction opportunities in the first quarter were relatively light, more recently, activity levels across the lower middle market have recovered, and we're currently working on a healthy pipeline of proprietary deals. We continue to see a proliferation of smaller, newly formed PE firms looking to take on smaller investment opportunities, with increased emphasis on buildup or acquisition investment strategies. These trends are well suited to our lower middle market focus, value proposition and focus on delivering senior secured unitranche financing solutions. From a liquidity perspective, going into the balance of 2015, the competitive dynamics for middle market loans are mixed. Several factors continue to suggest the tightening of the market, including: the cumulative impact of the regulatory pressures on leveraged lending by the banks; weak BDC stock performance to the point that many are trading below NAV, which service less in the competition, to book middle market loans; and obviously, uncertainty associated with the GE Capital's announcement to exit the leveraged financing business. The relatively weak flow of deals thus far in 2015 has, however, still competitive pressures with a few quality investment situations. Competitive pressure continues to be most pronounced in the larger end of the middle market, north of $10 million of EBITDA, where the commercial banks and broadest array of nonbank lenders operate. In the face of this competitive profile, our strategy continues to leverage our long-standing reputation in the lower end of the middle market and investor-oriented financing approach and continues to gain traction. We're focused on investing in our coverage of relationships with the private equity sponsor community and expect to be able to continue to source attractively priced unitranche transactions in the lower middle market. Our continuing priorities for the balance of our fiscal year ended 2015 will be: managing our remaining challenging credits in the portfolio to an orderly liquidation events, where possible; utilizing enhanced availability under the recently emended line of credit; and sales of our syndicated loan position or select first-lien positions to support the future growth of our proprietary debt portfolio. And now, our Chief Financial Officer, Melissa Morrison, will provide an update on the fund's second fiscal quarter financial results.

Great. Thanks, Bob, and good morning. I will now report on some of GLAD's summary financial results and overall portfolio-specifics for the quarter ended March 31, 2015. On our income statement, net investment income was $3.7 million or $0.18 per share for the quarter, which was unchanged from the prior quarter. Interest income on our debt investments increased quarter-over-quarter by $1.1 million or 14%, as the new originations added $483,000 on the quarter, as success fees declined in the absence of any excess compared to last quarter. Interest expense increased by $346,000 quarter-over-quarter with the increased utilization on our line of credit. However, the blended financing costs have dropped to 5.1%, inclusive of our term-preferred issue from 6.5% the prior quarter. Moreover, with the recent amendment and extension of our line of credit, we anticipate the borrowing cost to come down an additional 50 basis points. Nonfinancing costs, net of all adviser credits, on the quarter increased slightly by $149,000 compared to the prior quarter to $3.2 million. However, they declined relative to the average total assets to 3.5% compared to 3.8% last quarter. Net investment income of $3.7 million fell short of the common distributions declared of $4.4 million for the quarter. However, this shortfall does not reflect the recently revised line-of-credit borrowings or any adviser incentive fee credit. As we mentioned last quarter on the earnings call, our adviser elected to shift the determination of any incentive fee credit from a quarterly determination to an annual determination at the end of fiscal year, which for us is September 30, 2015. Our fund has experienced significant income swings on investment exits historically. And in the absence of a fee callback feature, the quarterly credit determination was expected to generate greater than 100% coverage of common distributions annually, as it did in fiscal year 2014. The adviser is currently working on several of such investment exits. However, we remain committed to providing a credit of the incentive fee to achieve net investment income sufficient to cover 100% of our common distribution on an annual basis, as we have demonstrated over the last several years. The low net investment income on our income statement are where we reflect realized gains and losses come from actual sale or disposal transactions of our investments. Unrealized appreciation or depreciation on our portfolio is a noncash event and represents the change quarter-over-quarter in the valuation of our portfolio. During the quarter ended March 31, 2015, the net realized losses were primarily due to a loss on the escrow amount from a previous sale and exit of a portfolio company. For the quarter ended March 31, we recorded net unrealized appreciation of $6.5 million on our investments. Over the entire portfolio, the net unrealized appreciation for the 3 months ended March 31 consisted of approximately $200,000 of net unrealized appreciation on our debt investments and $6.3 million of appreciation on our equity investments. Overall, our proprietary investments experienced net appreciation of $8.8 million, while we recognized net depreciation of $2.3 million on our syndicated investments. Our cumulative net unrealized depreciation of our investments as of March 31, 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. From a vintage origination basis, the Gladstone Capital portfolio as of March 31 consist of 10 companies originated prior to 2008 and 40 companies that were originated in 2008 and later. The portfolio investments that were originated in the last 7 years, which represents 72% of the cost basis of our portfolio, have performed very nicely and are currently valued at 97% of cost and do not include any nonaccrual loans. We are actively addressing the older vintage assets in the portfolio, as we have demonstrated over the last several quarters, and these assets were mostly in media, publishing and broadcasting industries that were adversely impacted by the recession and have been slow to recover. Approximately 86% of the $53 million in cumulative unrealized depreciation on our balance sheet relates to portfolio companies originated prior to 2008. We believe this vintage analysis of our investment portfolio reflects a marked distinction from the valuation of those assets originated over the last 7 years and shows the overall improvement in our portfolio an ability to manage through various economic cycles. Moving over to Gladstone Capital's balance sheet. As of March 31, 2015, we had approximately $382 million in total assets, consisting of $364 million in investments at fair value and $18 million in cash and other assets. Liabilities totaled approximately $181 million, consisting of $114 million in borrowings, at cost, on our line of credit, $61 million in term-preferred stock, and $5.9 million in other liabilities. In March, we entered into an at-the-market program or ATM, whereby we may issue and sell up to $50 million of our common stock. Since its execution, we have sold just under $1 million in our common stock to-date. We are also looking at other capital-raising opportunities in the future. Last week, we closed on a material amendment of our credit facility, which provides for decreased interest margin and commitment fees and extends the revolving period by 3 years to January 2019, with a 1 year extension option to 2020. In addition, other terms and conditions were omitted to expand the scope of eligible collateral and improved borrowing availability against secured first-lien loans. The amendment improves our cost structure, effective immediately, and revises our credit agreement to better match our core investment focus, making us more competitive in the future. In light of the company's near-term investment opportunities, we will also pursue an upsizing of the total amount of the credit facility in the near term. Overall, our net asset value increased quarter-over-quarter due to the increase in the cumulative unrealized appreciation on the portfolio. Net asset value increased from $196 million or $9.31 per share as of December 31 to $201 million on $9.55 per share as of March 31st. From an available capital perspective, as of today, assuming we continue to draw to fund eligible investments, we have about $24 million available in aggregate cash and availability on our $140 million credit facility. Additional investment capacity will be accessed from a combination of sources. Prepayments for exits expected from our syndicated loan portfolio, which at March 31 totaled $70 million, and through May, we have sold $3 million of the syndicated loans and have another $3 million we are expecting this week, the opportunistic sell-down of seasoned and performing proprietary senior loan and revolver positions and the planned exit of a number of other investments later in the year. In addition to the foregoing management continuously evaluates other new sources of capital. In summary, we believe, as the BDC, we are still are conservatively leveraged, as we adhere to the leverage restrictions requiring us to be no more than 1:1 debt-to-equity. Now I will review our portfolio statistics. Please take note that we have news to update this quarter's 10-Q reporting of our investment portfolio to better delineate our investments across secured first-lien, secured second-lien, preferred and common equity. The current asset mix at fair value is 89% debt to 11% equity and secured first-lien investments represents 50% of the total debt, and secured second-lien investments represents 39%, with no subordinate unsecured investments in our portfolio. We currently have 50 companies in the portfolio, which is up from 49 at the prior quarter end. Our portfolio is highly diversified by industry classification, with 19 different industries and by geographic regions. We continued to avoid industries in the housing, banking, high technology, venture capital, commodity products or highly cyclical industries. In summary, we continued to build the asset base of the portfolio by investing $31 million in new and follow-on investments during our second quarter of fiscal 2015 and maintained our portfolio yield, while continuing our focus on making prudent investments, which provide accretive returns to our shareholders. We believe that the strides we made on amending our credit facility will help us be competitive in the near future and support our commitment to maintain our long-standing track record of shareholder distribution. And now I'll turn the call back over to David.

All right. Good reports from Melissa and Bob and Michael. They are all good reports. And just to summarize, March 31, '15, Gladstone Capital closed several attractive investments, total of about $31 million. We maintained a healthy list of new investment opportunities that we hope to close over the ensuing months and continue to grow our business and develop resources. So we are moving along as planned, and everybody on the team is doing good job. Subsequent to March 31 quarter, we strengthened our capital position, obviously, when we amended and extended the $140 million credit facility by 3 years and achieved a reduction in borrowing rates as well as improved the collateral advance rates and better match our current asset mix. We also increased our liquidity by selling off some of the syndicated loans. Having all these banks come back in should give everybody some comfort they went through the company in a pretty thorough manner. Our main focus now, just like it was in the past, is making loans to more companies. Many borrowers are looking to take advantage of the capital availability and actively shopping financing. But most smart businesses are not just looking for low rates, they also want a partner, that's going to help them succeed, and this is where we Excel. With all of the business experience that we have and the strong relations that we have out in the marketplace with financial sources, we bring a very powerful package for each of the businesses to look at when we compete against others. Lastly, access to long-term capital will always be a top priority for us. We utilize our current credit facility and look to raise long-term debt and preferred and even some common stock along the way, as needed. Recent economic indicators appear to be moving in the right direction, but most of the moves are very uneven. This has been the slowest, most uneven recovery that I have experienced and seem to be 2 steps forwarding and 1 step back. To continue to monitor our concerns in the economy, mainly volatility of the oil and gas industry is one thing that continues to bother us. We're just not sure what impact that's going to have on the businesses that we look at. But that area seems to be stable now, and the whole oil and gas industry is benefiting from increasing prices that have moved up pretty substantially in the last couple of months. Uncertainty around the timing of Federal Reserve's increasing interest rates is driving all of us crazy. We just don't know what they're going to do. I think God only knows what's going to come out of that institution. But remember, most of our loans have variable rates, and so if rates do go up, the interest paid on our loans, we should have to match that up directly with what we are borrowing. So as their rates go up, so do ours, and we keep our spread, hopefully, during the future events. What seems unrealistic also is that Japan is printing more money and so is Europe, and I call this stimulation. But we all know it's a bit of insanity since you can't print money and solve your problems. Inflation is expected to be relatively contained as Fed's long-term target of 2%, not close to that. GDP growth seems to be consistently uneven. We're now at a low point and perhaps the second quarter will show some upward movement, but the first quarter may even be a negative, when they finally adjust it. The fiscal crisis at continues to spend too much money on the federal government. Well, that's on the top of my mind, and I think to talk about it all the time. The federal deficit is now over $18 trillion and continues to climb -- climb as the government continues to spend. We all know this can't go on. It's just going to pile us into inflation somewhere along the way. The government now has more than $70 trillion in promises the citizens in the form of healthcare, welfare, retirement and all those other promises, like social security. There is no way that all of those can be honored as time goes on. The government is just going to have to print money or default, and I guess they'll do some or both of that. Geopolitical tensions continue around the world. They impact the U.S. marketplace and fund market in particular with Middle East is a mess. China and Russia continues to test us and make trouble for the U.S. in various points. And federal and state governments seem to have gone crazy with regulations. Every day there seems to be another pound of regulations that comes out of the government. Many of the private companies like those which we invest, still there's much too much regulation around healthcare, financial markets, energy and environment. They really do hinder the growth of these small business. And we count on those small businesses for creating jobs, and they're now at a low point, it looks like back as far as 20 years ago. Despite these economic issues, we still find good little companies out there to invest in. They are middle-market-size businesses. They're not the little tiny businesses like a restaurant, but one has to be very, very selective in this marketplace. Small businesses are important part of our economy and primarily drive growth, of course, and we want to be able to help them grow. In April 2015, our Board of Directors declared a monthly distribution of $0.07 per common share at the regular distribution, on new preferred shares as well were declared for April, May and June. And the board will meet again in July to consider and vote upon the monthly distributions for July, August and September. Through this date of the call, we've paid $147 million sequential monthly and sometimes quarterly, before we started going monthly, distributions to our common shareholders, and we've never missed a distribution. BDC is typically known as attractive dividend yield and easy liquidity, and that way public investors had access to private companies. At the current distribution rate for all of our common stock and common stock priced at $8.79 yesterday's close, distribution run rate now producing a yield of about 9.5%. BDC industry is right in that same range, so we're not above or below, seem to be right in the same range as the rest of the BDC industry. Our net asset value at $9.55, so when you buy the stock, you get a great value. You're paying $0.92 for $1 worth of assets. So you get a great yield of 9.5%, and you'll also buy below the book value. And don't forget, we do have one company that's going through a sale process that may produce some substantial capital gain for us, maybe in July or August time frame. But that's out there. It's working and that could change a lot of the cash that we have available for new investments. Our monthly distribution is $6.75 for our preferred stock, translates into $1.69 annually. Term preferred stock is trading on NASDAQ under the ticker symbol GLADO. It's currently trading at about $25.61. That's about a 6.6% rate. So that also has attractive yield and long-term payout for people who own the stock. So in summary, we are closing some new deals. Third quarter ending June 30, 2015, we think that's going to be good quarter, expected to have good movement forward the rest of the fiscal year 2015 that ends -- end of September. And so now we will stop and have the operator come and get some questions from you folks out there in telephone lines.

[Operator Instructions] And our first question comes from Bob Brown, Private Investor.

A few questions. First of all, on the last quarter call, you talked about improvements in Sunshine and Heartland. I know you mentioned Sunshine earlier. I was wondering if you could update us on Heartland.

Bob, do you want to talk about Heartland?

Yes, Heartland is a smaller company. We are currently working through an exit plan that falls in the category of transactions that we expect to close, but can not cover specific details. Smaller businesses oftentimes take negotiation of sale of asset and/or refinancing in order to affect an exit. We are working on both of those fronts and hope, as we said earlier, to be able to report on that in the next quarter.

Okay. Second question is, you mentioned -- I know that seasonality, you mentioned, are low in terms of first quarter deals. I was wondering, at least on an annual basis, do you have kind of -- what are the goals? And what should we try to expect in terms of for new loan originations, even if it tends to be a little lumpier on a quarter-by-quarter basis?

I think, when we look at the market flows, we have a certain number of business development folks, we have a certain amount of market coverage. We're currently running -- I think this quarter was an okay quarter. $30 million, $31 million invested is probably a little bit low, given the average transaction size and resources. I would say that the fourth quarter, which if I recall was north of $60 million of closings, was probably a little high. So if you were to try to take a midpoint of those 2, I think you would probably come up with an average expected on a quarterly basis, which I think would put you probably in the $150 million range ballpark. When we think about it, that's probably on the order of 14 to 16 deals over the course of the year. Relative to our staffing, relative to our ability to due diligence and relative to our normal market flows that's probably a good place to be.

Okay. And so if you could just help me understand the issue about the adviser credits -- in other words, in theory, if there was no success fees and we ended up $0.18 a quarter, so we were short, what, $0.03 x 4, $0.12, we get a credit back from adviser of $0.12 sort of the dividend would be covered?

That's the understanding. I will say that the unusual thing in our portfolio, much like other BDCs without equity-oriented instruments, as David had alluded to, there is a couple of things on the horizon that we expect to be able to realize on, which will cause a lump of potential opportunity cash flow and earnings. And we expect that to back fairly significant portion of whatever that shortfall is. And to the extent that, that doesn't happen, we've reiterated our commitment to support the -- we would exit that investment and clear that $0.03 shortfall for a couple of quarters. We would not, obviously, have to waive a portion of the incentive fee to make up that shortfall.

So Bob, just to piggy back on back on that, we have 2 fees that come in. One, of course, is the regular advisory fee that we get; and then there is an incentive fee. So we use the regular advisory fee to pay all the people base salary and a little bit extra, and then the incentive fee is used primarily for our bonuses at year end. And so when we give up back some of the bonus earnings that we have gotten, that's what's you're looking at when we say a credit to the dividend. So everybody here is working to make sure the dividend hits the Mark, because if they don't, come out of the bonus pool. So it's a direct relationship between us and the shareholders.

Correct. Got it. And last question. In terms of -- if there is a backup in rates, right -- in other words, so if the rates rise by 0.5 point or 1 point, is it simply dollar-for-dollar? Or would we expect to see -- in other words, at the expense -- the interest expense we pay were essentially just to offset the extra income? I assume not. I assume we'd be making more money as rates go up. Is that correct?

The first, roughly, 75 basis points would be a -- and there would be a negative consequence. Many of our loans have floors in them. Because LIBOR rates are so low, as LIBOR increases, until it clears the floor of all the existing loans, there would be an increase in interest expense relative to the interest income. The total amount of that exposure is relatively modest. It's, I think, in the order of magnitude -- I think, the number is something around $0.5 million of the exposure. After the LIBOR increases beyond that, it would be 1:1.

1:1, got it. Okay, so the increase in rates, I mean, were hedged essentially, but it's not like it would be a windfall for us?

That's correct initially, and then as it moves up, it's 1:1.

Obviously, that directly increases the yield on the underlying common, once it goes beyond that floor.

All right. Well, I'm sorry. Can you explain that last statement?

Well, because we are leveraged less than 1:1, as the interest income increases, we will have more net interest income to support the dividend.

You don't have all your deals covered by debt. Obviously, some of it's covered by equity as well as it's more equity than it is debt. So as a result, you're going to have a pickup as interest rates go up.

[Operator Instructions] And I am showing no further questions at this time. I'd like to turn it back to David Gladstone for closing remarks.

All right. Thank you, all for calling in. That's the end of this call.

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone, have a great day.