Gladstone Capital Corporation (GLAD) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Gladstone Capital Corporation’s Fourth Quarter Ended September 30, 2015 Earnings Call and webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now turn the conference over to Mr. David Gladstone. Please go ahead, sir.

All right. Thank you, Candace, nice introduction. And hello, everyone. It's a nice crisp morning here in Washington DC. This is David Gladstone, Chairman, and this is the fourth-quarter and the year-end earnings conference call for our shareholders and analysts at Gladstone Capital. The common stock's trading symbol is GLAD, and the preferred stock's trading symbol is GLAD with an O after it. Thank you all for calling in. We're always happy to talk to our shareholders and analysts and offer them the opportunity to provide an update on the company, the investment portfolio and our business environment. As always, you have an invitation to visit our offices here in McLean, Virginia. We're just outside Washington DC. We also have some offices in Chicago, New York and Los Angeles. The Gladstone team has grown to about 65 people now, across the four funds which we manage. Today, we represent - manage about $2 billion in assets. Now, we'll hear from our General Counsel and Secretary, Michael LiCalsi. He's also the President of Gladstone Administration, which is the administrator to all the Gladstone funds and the related companies, and he'll 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, 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 listed under the caption Risk Factors in our Form 10-K and our registration statement as filed with the SEC, all of which can be found on our website www.gladstonecapital.com or the SEC's website 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 except as required by law. Please also note that past performance or market information is not a guarantee of future results. We ask that you visit our website and sign up on our - for our email notification service. You can also find us on Facebook; the key word, The Gladstone Companies and follow us on Twitter at GladstoneComps. You can read our earnings press release issued yesterday and also review our Form 10-K for our fourth quarter and year ended September 30, 2015, also filed yesterday with the SEC. You can access the press release and 10-K on our website gladstonecapital.com and the SEC's website as well. An audio presentation of this phone call will be archived on our website. And now, we will begin by hearing from Gladstone Capital's President, Bob Marcotte.

Thank you, Michael. Before diving into the detailed results for the quarter and the fiscal year, I'd like to provide a brief overview of Gladstone Capital and our strategy. Gladstone Capital or GLAD, as we're commonly referred to, is the lending fund within The Gladstone Companies. We provide cash flow based loans to privately held, US-based, lower middle market businesses, which we define as having $3 million to $15 million of EBITDA. Our target asset mix is for loans to represent approximately 90% of our portfolio, with equity co-investments representing the balance. Our loans are used to finance private equity buy-outs, make acquisitions or provide flexible unitranche financing to capitalize on a company's organic growth opportunities. As David mentioned previously, GLAD was one of the first BDC's focused on lending to the lower middle market, and today, that dedication, experience and consistency are a core part of - core competency and a core part of our value proposition. The majority of our investments are proprietary unitranche loans to growth-oriented or recession or resistant businesses. However, like other middle market lenders, our average leverage levels are typically below that of the broader syndicated market. Our investments are generally made in concert with private equity sponsors or owner-operators with significant equity at risk and may include equity co-investments. 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, now let's review the portfolio activity during September 30, 2015 quarter and fiscal year end. With respect to our investment activity, we are pleased to report that Gladstone Capital's fourth quarter originations continue to be strong, totaling $40.3 million, including four new deals. Asset sales and pay-downs for the quarter totaled $11.8 million, resulting in net originations of $25 million. This level of deal flow was slightly above what we have been averaging over the past 6 quarters, but generally consistent with our targeted level of proprietary originations. At a high level, the originations on the quarter were attractive in that they represented an average level of 3.3 times EBITDA and an average yield of 10.7%. Including in these new deals, there was: a $7.2 million secured second lien debt and equity co-investment in the private equity buy-out of Mikawaya, a producer of specialty frozen desserts, a $13 million secured first lien debt to refinance the debt of TWS Acquisition Corporation, a private equity owned post-secondary skilled trade school; $8.3 million went to a secured first lien debt and equity co-investment in Triple H Food Processors, the co-packer of branded and private label liquid and related food products; an $8.5 million secured first lien debt and equity co-investment in Flight Fit N Fun, a trampoline park operator. In support of these originations, we exited several of our syndicated loan positions, including a $7.2 million position sold during the quarter and a $4 million position which we closed just after the end of the quarter. However, given the weak fund flows and price levels in the syndicated loan market, we elected not to sell additional syndicated loans to fund our net originations, but funded them with draws under our line of credit. The combination of our elevated leverage position at quarter end and the continuing flow of attractive proprietary loan opportunities contributed to our decision to raise equity shortly after the end of the quarter, which Melissa will discuss later. In addition, as we highlighted in our recent press release after the end of the quarter, our investment in Funko was sold resulting in net proceeds on our debt and equity investment of $27.1 million. Given that most of these proceeds related to the realization of our equity investment, including a gain of $16.6 million, the reinvestment of these proceeds in yielding loans should provided additional lift to our net interest income over time. For our fiscal year, ended September 30, 2015, we closed on 11 new deals and 4 follow-on investments, which contributed in large part to the net increase of $84.6 million or 30% in the fair value of our investments on the year. Equally important is the credit quality in yields on the net asset growth, and we're proud to report that the secured first lien debt represented more than 90% of the portfolio increase and that at closing, our proprietary originations had a weighted average level of 3.3 times EBITDA and a weighted average yield of 10.1%. Our current pipeline continues to look solid. However, the scale of the portfolio liquidity events after the end of the quarter will make it challenging to increase our investments this quarter. But we've significantly reduced our leverage, improved our investment capacity and we are well positioned to continue to capitalize in what we believe are attractive, lower middle market investment opportunities. With respect to the portfolio overview and performance. In reviewing the portfolio performance, we're pleased to report that our weighted average yield has remained consistent over the last several quarters at 11.3%, when excluding non-accruals and reserves. This was achieved despite the fact that a majority of our originations as described earlier were relatively low leverage senior secured unitranche financings, which have been increased from 46% to 57% of the fair value of the portfolio over the past year. The current asset mix today, inclusive of the post quarter end events, at cost, is 91% interest-bearing debt and 9% preferred or common equity. As of September 30, 2015, we currently have 48 companies in the portfolio, which is up 45 from the prior year end, which reflects the healthy level of origination activities and asset growth during the past year. Our portfolio is highly diversified by industry classification with 20 different industries and headquartered in 20 different states. For the quarter, ended September 30, net realized depreciation on the portfolio was higher than expected at $9.5 million. However, most of this portfolio decline was attributed to tax - accrued tax liability related to the subsequently closed sale of our Funko investment. The net decrease in the fair value of the balance of the portfolio of the quarter was $2.5 million and much of that was associated with the decline in the broader syndicated loan and trading levels on the quarter. During the quarter, we addressed a number of our non-earning assets, and as of today, we've exited two and restructured a third. Specifically, we exited Saunders & Associates and in October, we exited Heartland for cash proceeds of $1 million and $1.5 million respectively. These exits were consistent with our prior valuations that represented realized losses of $8.9 million and $2.7 million respectively. In addition, during the September quarter, we restructured our investment in GFRC in connection with a transfer of the operations to a new entity under the control of a new management team and we've placed the new loan to the restructured entity on an accrual status. The restructuring did not result in a material change in the investment valuation. However, we did recognize a realized loss of $10.8 million, but retained a significant equity in the new entity and are hopeful to recover a portion of this loss over time. With the exit of Heartland in October, our non-earning assets are down to one company, the fair value and the fair value of our non-earning assets are down to $5.7 million or 1.6% of our September 30, 2015 portfolio at fair value. With respect to our oil and gas exposure, we continue to monitor our positions closely. The industry exposure represents 51.1% - $51.1 million or 14% of our portfolio at fair value and continues to perform well given its limited exposure commodity prices drilling activity and conservative leverage. All of our investments have ample liquidity to continue to service their debt and have or are in the process of making strategic acquisitions to capitalize on market opportunities and deleverage the businesses with the support of strong and experienced private equity sponsors. Cumulative net unrealized depreciation associated with our oil and gas loan portfolio totaled $3.5 million as of September 30, and the fair value represents 93.6% of cost. With respect to portfolio yields in our income. For the quarter, the total investment income was $10.2 million, which is up 2.4% or $200,000 compared to the prior quarter, based on increasing average earning assets as the weighted average yield was unchanged at 11.3%. For the fiscal year ended September 30, total interest income was up 8.5% or $2.7 million, with the growth in our average investment levels and the reduction in our non-earning assets. For the year, other income decreased compared to the prior year by $1.2 million, as both success fees and dividend income were down. In total, other income was approximately 8% of total investment income for the year, as compared to 12% for fiscal yea 2014. Our debt portfolio is well positioned for any interest rate increase with 84% of the portfolio in floating rate investments and 16% in fixed rate investments. Our floating rate investments typically have a LIBOR floor and the weighted average floor on our variable rate loans was 1.8%, while the weighted average margin is 9.3% as of September 30. Our proprietary loans totaling 85% of our portfolio cost had a weighted average yield of 11%, while our syndicates totaling 15% of the portfolio at cost had a weighted average yield of 10.9%. At a 100 basis point or 200 basis point increase in one month LIBOR, our portfolio net income as of September 30 was declined by $900,000 and $300,000 respectively. This interest rate sensitivity has however been reduced with a significant reduction in floating rate bonds [ph] since the end of the quarter, and the impact of the 100 basis point rise in LIBOR is a decline of net interest income of less than $100,000. With respect to investment climate in our backlog and outlook, over the past year, ended September 30, 2015, we've averaged just over $31 million of originations per quarter, which is consistent with the current activity - level of activity we're seeing across the lower middle market in our current pipeline of proprietary deal opportunities. We continue to see private equity funds looking to take on smaller investment opportunities with increased emphasis on build-up and acquisition investment strategies. These trends are well suited to our lower middle market proposition and focus on delivering senior secured unitranche financing solutions. From a liquidity perspective going into fiscal year 2016, competitive dynamics for lower middle market loans continue to be positive, including the cumulative effect of regulatory pressures on leverage lending by the commercial banks, withdrawals from the loan funds and higher secondary market yields has reduced the pressure of larger funds to move down market, and the weak BDC prices and limited investment capacity is less than competitive pressure to book middle market loans. Competitive - competition continues to be most pronounced in the larger end of the middle market, greater than $10 million of EBITDA, where the commercial banks and the broadest array of non-bank lenders operate. In the face of this competitive profile, our strategy continues to be leverage our long-standing reputation in the lower end of the middle market and investor-oriented financing approach continues to gain traction. We are focused on investing in our coverage and relationships with the private equity sponsored community and expect to be able to continue to source attractively priced financing solutions to the lower middle market. The team's goals moving into fiscal year ending September 30, 2016 will be to continue to generate attractive senior secured private proprietary loan originations, to redeploy to recent liquidity events and grow the investment portfolio. Two, to capitalize on the recently reduced management fee and lower debt facility costs and the recent equity proceeds to lift investment income and shareholder returns, and three, to proactively manage any portfolio challenge as they occur, recognizing the growth headwinds being faced by various sectors of the economy, commodity or energy related businesses. And now, our Chief Financial Officer, Melissa Morrison will provide a more in depth update on the funds' fourth quarter and fiscal year end financial results.

Thanks, Bob, and good morning everyone. Let's start by reviewing the income statement. For the quarter, ended September 30, 2015, net investment income was $5.5 million or $0.26 per share, which increased by over 13% from the prior quarter. Interest income on our debt investments increased quarter-over-quarter by $300,000 or 3.2% as the new originations added this quarter and the last several quarters impacted this quarter's results. Other income was flat on the quarter at $800,000 or 7.6% of total investment income. Interest expense remained basically flat quarter-over-quarter, as the weighted average balance outstanding on our line of credit increased by $5.7 million. However, the full quarter benefit of our live debt facility costs offset any balance increase. Non-financing costs decreased by $500,000 or 16.6% compared to the prior quarter to $2.3 million or 0.6% of average total assets. This decrease is mostly reflective of the reduction in the base management fee rate of 1.75%, which was effective July 1, 2015. For the quarter, the NII was $4.9 million or $0.23 per share, excluding the fee waiver. For the year, ended September 30, 2015, net investment income was $17.7 million or $0.84 per share, down $0.03 per share from the prior year. Interest income year-over-year increased by 8.5% or $2.7 million, while other income decreased year-over-year by 4% or $1.3 million. The increase in interest income is reflective of the new originations added over the last year. Interest expense on borrowings increased by 46% year-over-year, as we stepped up the utilization of our line of credit to fund our portfolio growth. However, the increased use of floating rate funding and the lowered LOC costs enabled us to increase the applied investment margin over the course of 2015. Non-financing costs net of credit increased only $300,000 or 2.8% to $11.3 million in fiscal year 2015 versus the prior year, and as a result of the 21% increase in average assets, the non-financing costs dropped to 3.18% of average total assets from 3.75% the prior year. This past year's results reflect a focus on cutting costs for the fund, specifically, on the borrowing rate under our credit facility effective in May of this year and the base management fee rate under our advisory agreement effective in July of this year. These two expense reductions were in effect both for a full quarter only for the September 30 quarter and contributed to the list of NII per share and should contribute to an improvement in the 2016 results. As we have demonstrated over the last several years, our adviser continues to remain committed to crediting its fees so that annual net investment income covers our shareholder distribution. A low net investment income on our income statement is where we reflect realized and unrealized changes in the fair value of our portfolio, all non-cash transactions. During the quarter, ended September 30, the combined net realized losses of $19.7 million were primarily due to our exit of Saunders & Associates and our restructure of GFRC. For the quarter, ended September 30, we recorded net unrealized depreciation of $9.5 million on investments, which Bob already touched on. Our cumulative net unrealized depreciation of our investments as of September 30, 2015 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. Moving over to Gladstone Capital's balance sheet. As of September 30, 2015, we had approximately $382 million in total assets consisting of $365 million in investments at fair value and $17 million in cash and other assets. Liabilities totaled approximately $191 million and consisted primarily of $127 million in borrowings at cost on our line of credit and $61 million in term preferred stock. Overall, our net asset value decreased quarter-over-quarter due to the increase in the cumulative net unrealized depreciation, which includes the $0.33 per share impact related to the tax liability and the valuation of the Funko investment. Net asset value decreased from $9.49 per share as of June 30 to $9.06 per share as of September 30. Subsequent to September 30, 2015, we closed on a common stock offering for 2.3 million shares for gross proceeds of $19.7 million inclusive of the over allotment. This offering was at a 5.6% discount to the $9.06 September 30 net asset value before issuance expenses. Based on leverage restrictions, the uncertain timing of other liquidity events and the continued flow of accretive investment opportunities, we felt this small issuance even though below NAV was the best option for the fund. Inclusive of all the liquidity events, we are well-positioned going into our fiscal year 2016, and as of today, we have about $87 million in aggregate cash and availability on our $170 million credit facility to fund additional new investments. In summary, we were able to deliver strong operating performance in our fourth quarter of our fiscal year. Our results for the quarter and for the year end reflect several initiatives during the last year, building the interest earnings asset base, reducing fees and costs under our management fees and borrowing costs, and liquidating certain positions, including credit challenges. And now, David will conclude the call.

All right. Good report, Melissa. Bob and Michael both gave good reports as well. In summary, the quarter, ending September 30, 2015, for Gladstone Capital was a busy one. We continued our investment momentum by adding four new properties to the proprietary assets to the portfolio, totaling about $37 million and generated about $42.5 million in liquidity from portfolio exits. And some of that was - a little bit of that was after the end of the quarter, including the significant gain of about $16.6 million. We exited or restructured three non-accrual loans for proceeds of about $2.5 million during or right after the quarter. And we managed our costs by including the reduction of the management fee paid on the assets. We dropped that from 2% down to 1.75%, which seems to be a pretty standard for the BDC's that are lending oriented. We see this quarter set up for the company for a strong fiscal year end September 30, 2016 and a large exit from sale of Funko was a great example of a small investment in middle market company that deliver great results. And because we believe we will be able to shelter much of the capital gains, we can invest that money into new investments and that sort of turbo chargers the earnings because it's like having free equity. We also look at the economy; the outlook for the future is definitely dependent on the economy. We considered some of the recent economic trends and right now, the main things that bother us are the same that we had mentioned in many of our reports. Volatility of oil and gas, not knowing where that's going to go, obviously, low gas prices are great for many the businesses, but not very good for the businesses that are in the oil and gas business. So we have to watch that and watch what's going on. Uncertainty around the timing of the Federal Reserve's increasing interest rates before the year end; I'm not sure there's much uncertainty anymore. That seems to be on target for December. Economic concerns with China, which has been the engine that's driven most economies around the world; they seem to be - people seem to be leaving the country now and putting their money elsewhere. Public finances are stretched, so it looks like a rough slide now for the economy in China. One thing that bothers us, always, is the federal deficit of over $18 trillion now. It just continues to climb. There seems to be no slowdown. What we need coming out of Washington is an austerity program. It doesn't seem like that's on the horizon anytime soon. Then Federal, State Regulations around the many private companies like those we invest in, we feel there's just too much regulation that hinders the performance and the expansion, and certainly, the job growth of these small businesses have produced so much of the economy. The fund experienced professionals who'll continue to manage the company through all these challenges as we have in the past, and we'll continue to do a good job and have good distributions. Despite the economic trends, which seem to be falling a little bit, it continues to be a great time to invest in small and middle market businesses. There are some very nice ones out there. We keep finding them. But one has to be very selective; small businesses are an important part of the economy and the primary driver in job growth for the United States and we want to participate in that part of the economy as well. So in October 2015, our Board of Directors declared our monthly distribution of common stock at $0.07 per common share for - per month and then the regular distributions of our preferred shares were declared for October, November and December as well. The Board will meet again in January to consider and vote on the monthly distributions for January, February and March of 2016. And I'm hopeful that we can take a hard look at that with regard to where we go. Through the date of this call, we've made now 153 sequential monthly and some quarterly cash distributions in our common stockholders. That's almost $260 million that have been paid out. We've never missed a distribution. With a common stock price at $8.68 and the close yesterday, that means the yield on the stock is 9.7%, I think that's really strong and with a net asset value of $9.06, you're getting a bargain when you buy it at $8.68. So I hope you'll step out and buy a few more shares given this good report. Monthly distribution of 6.75% on our preferred stock, that's $1.69 annually. It's trading at $25.61. That is yesterday; I think that's where was, and as traded on NASDAQ under GLADO, I think that's a terrific yield for a stock that would be hard to ever miss the dividend on. So with that, in summary, we've had a very strong quarter, very strong year and asset growth in building liquidity and scaling our cost to build income and hopefully, a dividend growth in the future. Now, I'd like to turn the call back to the operator and take some questions from our shareholders and analysts.

Thank you. [Operator Instructions] And our first question comes from David Chiaverini of Cantor Fitzgerald. Your line is now open.

Thanks. Good morning. A couple of questions for you. So on the oil and gas exposure, you mentioned that the companies are performing well, have liquidity. You also mentioned that they are exploring acquisitions. So I was just curious, would that require incremental investment from Gladstone Capital and if so, since the exposure is at 14% of the portfolio now, where do you feel comfortable bringing that exposure to?

Thank you, David. I think the reference was, they are looking at growth. As of September 30 one of the investments, for example WadeCo, made an acquisition funded with 100% equity. So the result was, the debt didn't move, the EBITDA grew and the company deleveraged. Another one of the companies is looking at a similar situation, maybe a small amount of ABL financing based on the acquired assets. But generally our approach here is these are largely funded by equity. They are deleveraging events and we are not looking to increase our exposure. We are looking to reduce our exposure, but first and foremost, is reduce the leverage and increase the financial flexibility of the company, secondly, reduce our overall exposure.

Great. Thanks for that. And then, a follow up question. You guys are now kind of flush with capital between all of the repayments and exits post quarter end, as well as with the common stock offering. I was just curious, you mentioned about how given all the repayments in the fourth quarter that you would expect the net portfolio growth to dip in the fourth quarter, but on a go forward basis, what would you say is the timing of reinvesting these proceeds?

Well, I think as I referenced earlier, we've been averaging somewhere between $25 million and $30 million of originations per quarter. This most recent quarter, we've probably had a pretty significant surge in the repayments or liquidity events. I think going forward, that will abate and the normal origination pace will absorb the additional capital, whether its two quarters or three quarters, I don't think. Typically Q1 is not a particularly busy quarter, but we definitely feel that roughly a $30 million assumed origination pace, the capital availability that Melissa referenced, which I think was approaching $80 million is more than enough to cover the next couple of quarters.

Okay, great. Then, my last question. You guys mentioned in the prepared remarks and in the press release noting about the ample capacity to grow earnings and potential shareholder distributions in the future, potentially increasing shareholder distributions in the future. Is it fair to say that, that would happen only after the fee waivers are no longer necessary to support the dividend?

I think the focus that we are looking at, at this point is, the lift and the coverage that comes from the reinvestment and the fee adjustments certainly provides for momentum. And yes, I think, it's fair to assume that once we get to a point of normalized fee levels that could be taken in consideration.

And David, just to back that up. Our goal here is, as we've been doing over the last year, to reduce all of those and even take the write-offs if necessary in order to get money out of companies that weren't performing and move on. I think we are down now to one and maybe two with another one limping along a little bit but making payments. But at this point in time, the goal quite frankly is to get ourselves in a position to start to raise the dividend. I don't have a date when we are going to do that, but that's the goal. And so this company has finally come back into its own, it's now got a good portfolio, and we want to make distributions to shareholders. That's our goal.

Great. Thanks very much.

Next question?

Thank you. And your next question comes from Christopher Testa of National Securities Corporation. Your line is now open.

Hi. Good morning. Thanks for taking my questions. Just with regards to Sunshine Media seems to have had some more positive fair value marks, just wondering if you could discuss the direction of that company and the potential for it to be possibly be placed back on accrual status?

A couple of events there. There has been some – we are working a rationalization of potentially monetizing or exiting a portion of their business that was a distraction to the core operations. Secondly, as we've done across the portfolio, these companies run through a rotation of third-party valuations. It happens that on the quarter, that was a company that was valued by an external advisor. As a result of the market momentum for companies in that sector, combined with that monetization effect, it had a change in the valuation of that company. I will say that their revenues are somewhat lumpy. They happen to provide advertising related services to large hospital and healthcare related businesses. And based upon the growth of that business, we will assess whether the rest of that investment can come back on to full earnings status. But, I can't comment on when that might be. It’s still a work in process.

Okay. And just given your comments on private equity funds, looking at smaller companies and deals now, are they taking on - are they looking for structures that are similar with kind of the attachment point leverage that’s currently in the portfolio or are they more stuck in the mindset of having deeper attachment point leverage that they generally would have more kind of upstream in the market?

There is always a little bit of pressure to try to make the terms look similar to upstream markets. And obviously, that's the challenge. For the most part, because they are coming down market, they recognize that growth and flexibility is critical. So we tend to be reasonably successful that over leveraging out of the box is counter to their flexibility and growth objectives. So we tend to be reasonably successful. At the same time, I will say that because we tend to focus on growth oriented businesses, current leverage and near-term leverage are also taken into consideration. So we will see larger sponsors come in. There may be very near term investments and growth opportunity. And so that will be taken into consideration. So there are times when the leverage may be slightly more elevated, as a result of what we expect to be very significant near term growth. But for the most part, you've seen and we publish our leverage in our portfolio not only in this quarter, but in prior quarters in our quarterly presentation. I think you've seen a pretty consistent leverage level commensurate with what we see in the broader, lower middle market.

Great, thank you. That's great color. And just for the syndicated loans, I know the marks have become steeply negative due to the credit spreads widening, are they starting to look attractive at all? Is there a potential to actually be a buyer of these given the volatility in the market or is this something that you want to shy away from given the potential for further marks downward?

On one hand, I think you raise an interesting point, where yields are backing up and it is making it look more attractive and accretive. But I think two things we need to keep in mind. One is, as you commented earlier, the leverage level, attachment level for those deals continues to be very high. They're coming to that market and they are trading at that level because you're looking leverage levels that are easily almost 2X where we are currently leveraging our existing investments. So that raises some level of concern despite the attraction of the yields. Secondly, I think the last probably 60 to 90 day since August has clearly created some concern about the potential marketability and liquidity of those assets. Banking on the fund flow to market liquidity of an investment that's not necessarily in our core, nor does it have the control and covenants that we prefer is something that obviously is going to create pause. I wouldn't say that we wouldn't consider it, but those two factors have to be taken into consideration. And at this time, we do not see a significant movement on those items to suggest we are going to spend much of the available capital going at that market.

Okay. And just last one for me is just, given the secondary offering's going to deleverage you guys pretty significantly, what's your target that's equity going forward?

We've debated that one a lot here. We keep pushing that around. Obviously, we don't want to drop to close to the 200% test that we all look at, which is one to one leverage. We need to have plenty of room there. So the goal is, if you get close to the 220, then it becomes a little bit sticky and we want to stay away from that leverage. Because no matter what we do in this business, the valuations are quite volatile, you might have something go on in the marketplace and change all of our values up or down. And so as a result, we just have to leave plenty of room so that we don't break that number of 200% test.

Great. Thank you for taking my questions.

Next question?

Thank you. [Operator Instructions] And our next question comes from Bob Brown, Private Investor. Your line is now open.

Thanks. In the quarter you said that the net asset value is impacted by the tax accrual on the sale that took place subsequent to the quarter. Was the actual sale proceeds reflected on the asset side of that in the - or do we just get hit with the expense and we're going to get the benefit of the increase in this quarter?

I think the answer to that is, the net asset value as of September 30 was adjusted to the after-tax estimate of what we received in the October timeframe. So it was brought in line. We don't typically, until a transaction comes close to fruition began to get into the detailed assessment of what the ultimate tax liability was. But given the impending nature of that transaction and the fact that it closed, almost coincidentally with the closing of our books, it was reflected as of the September 30 balance sheet date. So there really will be no follow-on adjustments in the current quarter.

Okay.

And Bob, just to add to that, as you probably remember, this was a co-invest with our partner over in the other fund in Gladstone Investment. And normally there, we are in control. But in this situation, I mean the two funds, we're not in control. And so we had to make amends with the buyer. They didn't want to assume the blocking corporations that we have in place and so we had to pay tax on that. So we got blindsided a little bit by that transaction. Future transactions should not have that problem. But one never knows when you're going to run into something like that. So it was a little bit of a curveball to us when we got closer to the closing and that's why we didn't accrue it in the early years because we thought it would happen the same way as all of our other transactions. But this one got crossways for us.

Got it. Thank you.

Next question?

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Gladstone for closing remarks.

All right. Thank you very much to all of you for calling in. We appreciate those good questions. Those were excellent questions and we always like to have questions because it helps us steer the documents that we give to the SEC and answer questions in those, so that you don't have to ask them on this call. So that's the end of this. We thank you all for calling in. See you next quarter.