Gladstone Capital Corporation (GLAD) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Gladstone Capital Corporation’s First Quarter Ended December 31, 2017 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference Mr. David Gladstone, Sir, you may begin.

Thank you, Amanda. A nice introduction. Good morning, everybody. This is David Gladstone, Chairman, and this is the quarterly earnings conference call for all the shareholders and analysts of Gladstone Capital for the quarter ending December 31, 2017. Thank you all for calling in. We love these times when we get to talk with shareholders and analysts, and welcome the opportunity to provide an update on the company and the investment portfolio. Now we’ll call on our General Counsel and Secretary, Michael LiCalsi, who is also President of Gladstone Administration, which is the Administrator for all of our funds. Michael?

Thanks, Dave, and good morning. Today’s call may include forward-looking statements under the Securities Act of 1933 and the Security Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties, and other factors even though they’re based on our current plans, which we believe to be reasonable, and many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors listed on our forms 10-Q and 10-K and some other documents that we filed with the SEC, and these all can be found on the Investor Relations page of our website, www.gladstonecapital.com, or the SEC’s website, and that’s www.sec.gov. Now we undertake no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events, or otherwise, except of course as required by law and we also note that past performance or market information is never a guarantee of any future results. We ask that you take the opportunity to visit our website again, gladstonecapital.com and sign up for our e-mail notification service. You can also find us on Twitter, our handle there is @GladstoneComps, and on Facebook, the keyword there is The Gladstone Companies. Today's call is an overview of our results through December 31, 2017. So we advise everyone to review our press release and Form 10-Q, both issued yesterday for more detailed information. Now with that, I'll turn the call back over to Gladstone Capital’s President, Bob Marcotte. Bob?

Good morning all and thank you all for dialing in today. As a quick overview, I’ll focus my remarks on the results for the most recent quarter. Our portfolio and capital position, and conclude with some comments on the near term outlook for the balance of our fiscal 2018. And for those of you that are interested, we have posted our regular shareholder presentation on our website effective this morning. The highlights for the quarter ended December 31, 2017, include, during the quarter we closed four proprietary investments totaling $46 million, three smaller syndicated investments totaling $10 million, and several follow-on investments, which brought the total originations on the quarter to $57.9 million. We exited three investments totaling $14.9 million and along with other repayments on the quarter brought total repayments to $20 million on the quarter, resulted in net originations on the quarter of $37.9 million. Investment income was $10.9 million in the quarter, which was largely unchanged from the prior quarter. As interest income rose 4.4% with the increase in average assets, which was offset by lower prepayment or exit fee income compared to the prior quarter. For the quarter, the overall portfolio yield rose 20 basis points to 12%. Net investment income rose to $5.6 million, which covered a 100% of our dividends on the quarter of $0.21 per share, as average financing costs dropped with the reduced preferred costs, and net management fees were unchanged as new deal origination fees paid to the adviser and credited against the base management fee rose. Incentive fee waivers also declined on the quarter to $85,000. Net assets from operations totaled $0.27 per share, up from $0.21 per share last quarter, with $1.8 million of net portfolio appreciation in the quarter, which lifted the return on equity to 12.9%. Net asset value at the end of the quarter rose $0.08 to $8.48 per share from portfolio appreciation on the quarter and a small lift from the accretive commons share issuance. With regard to the portfolio overall, the asset mix on the quarter despite the level of activity was relatively unchanged, as secured first liens continue to represent 50% of our investment portfolio and total secured debt totalled 95% of our investments. You will note that we did experience a net increase in our oil and gas related assets on the quarter to 14.3% of our portfolio at fair value, as we closed a new proprietary investment just before the end of the quarter. The investment was for Impact! , a specialized chemical distribution company in the Permian Basin serving primarily the largest crude pipeline operators. The company is owned by a very experienced private equity firm in the sector that we know well, has a conservative leverage profile, and is in the segment that performed well in last cycle. Lastly, we've already received proposals to sell down a portion of a large tranche of one of our other investments in the sector and expect this increase in the sector exposure to be temporary. Our non-accrual investments were unchanged on the quarter, representing a total cost of $27.9 million at a fair value of $5.6 million or 1.7% of our portfolio at fair value. For the quarter just ended, we successfully grew our assets to over $400 million, while maintaining our diversity with 51 credits in the portfolio. The $400 million threshold was a target we laid out on one of our earnings calls early in 2017, and represents a new higher - high watermark for the company. With regard to the capital position and outlook. Since the end of the quarter, our investment activity and near term outlook for our lower middle market sector continues to be positive. Through the date of the call, we have closed one proprietary investment of $8.1 million and received three smaller repayments totaling $4.9 million. However, our near term backlog, including several high - highly probable follow-on investments continue to outpace our historical average originations. We ended the year with a bit more cash than is typical. However, we're very mindful of our current investment capacity and are taking several steps to address the matter. While we have approximately $34 million of availability under bank facility today, we are in the process of revisiting the size and pricing of this facility and hope to be in a position to make an announcement in that regard prior to the end of the quarter. With the recent completion of our shelf, we plan to reactivate our equity ATM program, provided our common stock continues to trade above net asset value as it has been very cost effective in supporting our growth over the past couple of quarters. Lastly, while prepayments have been modest in the past several quarters, we do anticipate them to pick up between prepayments, selective syndicated loan sales and selling down some of our oil and gas exposure, we're well positioned to continue to capitalize on our outlook for the lower middle market opportunities over the balance of 2018. Regarding the outlook. As I mentioned earlier, we're cautiously optimistic we should see net originations in the quarter - in the current quarter, at least on par with the elevated levels we reported last year. We attribute the current deal momentum as well as our ability to maintain our investment yields and portfolio performance in the past couple of years to our continuing focus on delivering added value solutions to growth oriented lower middle market companies. And while the lower middle market is not immune from competitive conditions from larger asset managers, and certainly there has been some spread compression, we continue to believe we are well positioned to continue to grow our investment portfolio and net investment income to support the growth of our shareholder distributions. And now, I'd like to turn over the call to Nicole Schaltenbrand, our Chief Financial Officer who will provide an update on the fund's first fiscal quarter financial results.

Thank you, Bob. Good morning, everyone. Let's begin by reviewing the income statement. For the December quarter, total interest income increased by 400,000 or 4.4% over the prior quarter, primarily due to the increase in the weighted average principal balance of our interest bearing investment portfolio from $343 million during the prior quarter to $353 million during the current quarter, as well as a 20 basis point increase in the weighted average yield quarter-over-quarter. Other income decreased by 400,000, primarily as a result of dividend income received in the prior quarter. Total expenses decreased slightly by 100,000, driven by a $100,000 decline total financing expenses. With the full impact of the recently refinanced preferred, despite higher average LIBOR and a 24% increase in average borrowings on our line of credit. Net management and incentive fees were unchanged at $2.2 million, as new deal origination fee credits rose with origination and the incentive fee credit declined to 85,000 during the quarter. For the quarter ended December 31, net investment income was $5.6 million or $0.21 per share and covered 100% of shareholder distribution. As we have demonstrated over the last several years, our advisor remains committed to crediting its fees, so that net investment income covers our shareholder distribution. Moving over to our balance sheet. As of December 31, 2017, we had approximately 410 million in total assets, consisting of $392 million in investments at fair value and $70 [ph] million in cash and other assets. Liabilities totalled approximately $184 million and consisted primarily of $131 million in borrowings outstanding on our credit facility, $52 million in the recently closed 6% Series 2024 Term Preferred Stock at liquidation value and about $3 million in other liabilities. Net assets increased by $6 million since the prior quarter end due to $1.8 million of net portfolio appreciation and $4.5 million of common equity raised under our ATM program. For the quarter, we issued approximately 471,000 common shares under our ATM program at a weighted average price of $9.69 per share. NAV per share increased by $0.08 to $8.48 as of December 31 compared to $8.40 as of September 30th. Looking forward, we continue to be well positioned to benefit from any upward movement in interest rates, as 91% of the portfolio is tied to floating rate investment. The weighted average LIBOR floor on these is 1.3%, and with floating rate assets of $370 million and only $130 million of floating rate debt, a 100 basis point rise in LIBOR should generate an approximate 5% increase in net interest income. Inclusive of the net origination over to the past quarter, our leverage position increased to approximately 80% at December 31. However, net of the cash paid ounce [ph] subsequent to the end of the quarter and some of the liquidity plans Bob outlined earlier, we believe that we are well positioned to continue to support a modest level of investment. Now I'll turn it back over to David to conclude the presentation.

Well, Nicole and Bob and Michael, I think you all did a great job of reforming our stockholders and the analysts that follow our company. In summary, Gladstone Capital continues to report a strong quarter and are very well positioned to continue to grow in 2018. Our year end at September 30, 2018, I think it's going to be one of our best years. Last quarter the team closed seven new investments of almost $400 million in assets now. So moving along to a high water mark and hopefully can go much higher than that. We have a great backlog of deals yet to go. Successfully sold or had repaid some of the loans that were - we had and exited from three investments all above par or at par or above par. The company has maintained a middle market focus. Overall portfolio yields which benefit greatly from the new tax law, these are - most people don't know what the middle market is, the third largest economy in the world. If you think about the U.S. being the first and then of course, the middle market at the U.S. and then China just before that. So it's quite a large market. We are in the lower middle market, but that seems to be the place that we can get strong returns. As always, we manage our portfolio of loans and we believe that we're well positioned to continue to grow the loan assets and enhance shareholder distributions. Distributions are the thing that I love the most. We've maintained and committed to paying its shareholders monthly cash dividends. In January our Board of Directors declared a monthly distributions of $0.07 per common share for the months of January, February and March and it's an annual run rate of $0.84 per share. Through the date of this call we’ve made about 180 sequential monthly or quarterly cash distributions to our common shareholders, total and almost 300 million in distributions. We never missed a distribution. That's about $11.45 per share on the shares outstanding at December 31, 2017. Current distribution rate of our common stock with a common stock price now down to $8.53, its - yesterday that distribution run rate is producing an average yield of about a 9.85% which continues to be an outstanding return relative to most of the yield oriented alternatives. Our monthly distribution of 6% on our preferred stock, which translates into a $1.50 annually, the term preferred stock under the ticker symbol GLADN closed yesterday at 25.08 [ph] which provides a terrific deal, a very safe stock to hold. That's $0.125 per month. That's getting paid. In summary, the company sees an improving position in private businesses that are mid-sized and with good management. Many of these are owned by middle sized buyout funds that are looking for experienced partners like us that will lend money to the businesses they're investing in. This gives us a chance to make attractive interest paying loans. which support our ongoing commitment to pay cash distributions to the shareholders. We've got a strong team here, continue to capitalize on this market. So now let's do the fun part. So operator, if you'll come on we'll have some questions from those on the call.

Thank you. [Operator Instructions] And our first question comes from the line of Mickey Schleien of Ladenburg. Your line is open.

Yes. Good morning, everyone. Bob you know, terms in the lower middle market were relatively borrower friendly the last couple of years and now we're seeing folks sort of coming to agreement that interest rates are definitely going to climb higher. So I'm interested in understanding what sort of assumptions you've made in terms of your underwriting over that time frame regarding the potential for higher interest rates to trigger more defaults, as companies have a harder time servicing their debt?

Thank you, Mickey. Couple of comments there. One is, you know, I think we are pretty transparent with the leverage levels that we've continued to underwrite. And as you can see from our shareholder presentations, leverage levels have not really spiked and certainly are not anywhere near some of the larger transactions and certainly the syndicated marketplace. Our average portfolio yield has not moved substantially. The other piece to that I would say is we are very focused on cash flow fixed charge coverage, obviously it being in a lower middle market we actually get covenants. So we are able to specify levels and manage those significantly. So you know, typically we're looking for leverage levels and debt service coverage levels that will be approximately to 1.5 range which is pretty healthy. Last couple of comments I would say, you know, for the most part while rates are going up, most of the analysis that we've seen, our tax rates are going down and tax rates are going to be far more impactful than interest rates going up as long as they can maintain profitability. And lastly, you know, as I've said repeatedly, we focus on growth oriented businesses, organic growth, they can deleverage the companies and generally it is outpacing interest rates that we are focused on. So all of those factors I think our companies are pretty well positioned on a go forward basis.

That's really helpful Bob. Just a couple of follow up questions if I may. In the past, you've been using the equity ATM pretty actively to help manage your leverage. But as you pointed out, your stock is now a bit below NAV, so I'd like to understand what your target leverage in terms of debt to equity is in this sort of scenario? And my other follow up question is, was there anything idiosyncratic in the quarter that drove the higher level of investment activity? That's it from me.

Okay. As I said, we are probably nearing the top end of the range of where we want to typically play. And as part of the process I outlined, the various mechanisms that we are already beginning to implement in terms of prepayments, in terms of asset sales, so I would not expect our leverage to creep much higher than where we are. And in terms of the elements of the portfolio, I guess I would say you know, closing four different investments, the largest one being 20, the average of those four being you know, closer to a $10 million range, which is historically the norm for us. I don't think there's anything too unusual there. I would say, the deal flow activity that happened in the third quarter, we saw a tremendous amount of flow in the August and September timeframe. Those deals ultimately percolated to a year-end closing. As is typical, Q4 tends to be a very busy quarter as people close out the calendar year. There was nothing unusual in those transactions that was tied to anything. They were very different businesses. Software, aerospace, and defense there was really nothing - there was nothing in the sector or those names or the size of those names that I would say is differentiated in any real way.

Thank you for your time this morning. That's it from me.

Just to tag on to that Mickey, the tax changes that have gone on are very well received in the small and midsize business market place. And I think you're going to see a pretty good run over the next year or two just based on that. Next question please?

Absolutely. The next question is from the line of Henry Coffey of Wedbush. Your line is open.

Good morning. Excuse me. So when I am just sort of looking at the balance sheet overall, it seems like we've got about two or three quarters of improving of fair value to cost marks, and you're also obviously - you know, there was some realized gains in the past. When you look forward what are your thoughts about, A, whether you'll be able to liquidate investments when required at a gain and B, you know, the overall balance sheet are we going to see continued recovery? And then kind of going back to the first question, you know, with rising interest rates, is that in and of itself going to kind of put downward pressure on the value of the portfolio?

Lots of questions - lots of questions in there. I think most of our deals Henry are variable rates, so as rates go up it's not going to put a big pressure on the valuations, we're going to follow it up. So positives there, we don't get hurt by rising interest rates. The small business is obviously at some point in time can't pay an interest rate, if it went. You and I remember years ago, Prime was 18, nobody could pay that. So you have to work with the small businesses. I don't expect interest rates to grow at a rapid pace. And I think all of this craziness in the equity markets, of the stock market right now are just noise. It would go back to something normal soon. But if you look at the liquidations as we go forward, I can't see any big capital gains. We get some capital gains from now or from time to time. I think you'll see a steady uptick in our valuations. I don't see anything that's out there that's destroying the marketplace at this point in time. But remember if the market place goes crazy, we have to value our portfolio down just because the whole world is being marked down. So we follow the market down. The old saying is when this tide goes out all the ships go down. So we'd have to follow that down in our valuation methodology. But I don't see anything big right now. This is an anomaly a correction and at this point in time is great time to buy this stock at almost a 10% return. So yeah, balance sheet will beat up a little bit by rates moving around, but not dramatically.

Henry, just to follow on David's comment, two points that I would make, one, I think you've seen in the last couple of quarters the improvements in a couple of our credit. Obviously they go down pretty quickly and they come back pretty slowly. These are conversations we have quarterly with our outside valuation firm at S&P. And it's not - it's not easy to get things moving up. But we have a number of our underlying portfolio companies that are improving and I'll point to a couple of the marks up in our oil and gas, one particular name in our oil and gas portfolio, there's still significant depreciation that has not been fully recovered, where of the underlying operating performance of that company has been stellar. So there's probably some positive movements on that side. The other thing that we tend to see in terms of appreciation, when I look down the top five of our assets, three of the top five have substantially deleveraged. When we go into our growth portfolios and we – you know, maybe will close at three or three and a half or something in terms of leverage, next thing you know, it's two or two and a half terms of leverage. Two things happen, one is they look at our interest rate of being in the low double-digits and they start to think about refinancing and two, in some of these situations we have warrants. So we don't value those warrants you know, based upon where those things are or where we're expecting them to trade. So there are a number of situations that have substantially deleveraged and I suspect we will have appreciation prepayment fees and/or some equity co-investment recoveries in those situations. So I think we feel pretty good about where we are and the fact that we haven't been taking large marks is indicative of the underlying operating performance of those companies.

So when you look under the table, you know, for getting interest rates or the stock market, we have seen worse David if you remember, and was - Prime was at 18, by the way I was - I was a hippie. So…

I was trying to collect loans.

So when you…

We were charging 5 over Prime at the time. So…

So…

I am sorry to interrupt…

The underlying - so when you look under the table, you're saying that the underlying performance is getting better and so you know, we’re in a positive shift, and you know, just when you look at the hard side of the companies, is what's driving your confidence?

Absolutely.

Absolutely. Yes, as I mentioned there's a lot of positive views of the world from the economic side not from the stock market there. There's so many crazy traders out there today that they bounce the market place. A lot of them are all automated. So you just never know who is selling and who is buying. Anyway, that's not what we look at, it's the underlying look at our company and the economics of the marketplace that we think of not the stock market.

Great. Thank you very much.

Okay. Next question?

And our next question is from the line of Christopher Testa of National Securities. Your line is open.

Hi. Good morning, guys. Thanks for taking my questions. Was the three $3.6 million transfer from first to second lien on the portfolio, was that all from Alloy Die Casting or was that something else, and what triggered that?

When we raised money inside of a portfolio company occasionally we will use a secured bank facilities for working capital purposes. And so when we raise a secured working capital asset and it goes beyond one internal [ph] EBITDA. Our bank line facilities require us to reclassify that as a second lien, even though theoretically we have our first line. So that business raised some working capital assets to support its growth and the new management team that's driving the performance there. And while we didn't actually change our security in any way shape or form it was dropped by virtue of a relatively small working capital line at the company. That is one of our challenged assets and it has improved substantially. The liquidity has been rebuilt. And I hope to be in a position to announce something more positive in the coming quarters on that particular investment. So don't take the - don't take the migration as anything that's negative.

Okay, great. Thank you for that. And how much of the unrealized gain during the quarter was from you know, idiosyncratic underlying performance versus positive changes on the tax reform?

We don't really - tax adjustments were not really a big factor in our valuations. Folks with bigger equity positions might look at that, but that is not factored into any of our analysis. Our movements were straight out of the valuations that we get, as I referred to earlier from our outside valuation agency. And there were one or two large adjustments that I would say probably are concentrated in - as I referenced earlier, dramatic recovery in one of our larger oil and gas assets, which I think was one of the biggest movers. And so I don't really see it as something other than the normal natural you know, improvement in the underlying portfolio.

Got it. And Bob I know you had mentioned that you know, subsequent to quarter end you guys hadn't sold down part of one our oil and gas related investments and you're expecting the spike to be temporary. What should we look at going forward as kind of a threshold of where you're comfortable having that as a composition of the portfolio?

Right now it's probably at the high watermark. We are working on slowing it down. But it's probably at just under 15% and that's a high watermark for us.

Oh, no, I understand, but I mean you know, subsequent you were selling it down. I mean, where would you be comfortable with that being. I know you had mentioned that that's pretty much the highest symbol [ph] it would be. I mean where would you be comfortable with that being?

You know, it's a very broad statement. Chris if your love - if your investments are two turns of leverage and you have an immediate liquidity event on the horizon, I find it hard to artificially constrain that. I would say it's the high end of the range. It will come down. I can't really specify - I don't want to put a continuing. We would not have taken on the recent investment if we didn't feel very comfortable about the circumstance around that business, that sector and that sponsor. So I don't want to be running the solid investments because I put a put a percentage out there that it's got to be asset-by-asset specific and in the situation I've already given you an indication of kind of where I get concerned about diversity. So it will come down, I don’t want to put a hard number on it.

Okay, that's fair. And last one from me, you guys have mentioned you're expecting prepayments to pick up and selling down some of the oil and gas and syndicated loans. Are you expecting that you're going to need a - you know, meaningful draw on that facility or ATM issuance for growth over the next quarter or two given those dynamics? Or should the sales that you're anticipating with the prepayments kind of be enough to drive portfolio growth next 1 or 2 quarters?

You know, it's a question that I'd love to be able to project for you exactly, prepayments as I said in the past are very difficult to project. You know, we've got situations in our portfolio where we are a second lien, earning low teens rate and there's no debt in front of us. So when that company decides to raise money and pay us off they could certainly do it. We have large exposures where we're getting similar rates and they're sitting on $25 million to $30 million of cash. So when they decide to make prepayments is entirely within their prerogative. We obviously hope some of these businesses as we originally underwrote them, our growth oriented businesses and they will find something to buy. They will find something to expand and grow [ph] drive appreciation of their equity. But calling that exact prepayment is certainly a challenge. The second thing that I guess I would note, if you look at the difference between what our ending balance sheet was, I believe we are at roughly $393 million of investment portfolio and our average assets outstanding which was $353 million, you're looking at almost - if we just maintain where we are, our earnings portfolio - our earning assets are $40 million higher than what we experienced on average for the last quarter. So we just have $40 million with additional earnings left off of the existing portfolio. And obviously our marginal borrowing costs from our bank lines are still fairly attractive. So we've got some momentum. It's the balance sheet that's probably at this point a bit more leverage than it's been in past quarters. In the near term, we are planning you know, between monetizations and some sell downs and some expected prepayments that we will see enough there to support some of our investment activity. I will say it will probably be somewhat constrained to the extent the - you know, ATM opportunity to issue is limited. I think we can manage the natural growth in some of the organic follow-on investments, but we may be somewhat curtailed as we pursue additional opportunities if the equity market is not conducive to continuing that ATM program.

That's great color. Thank you and that's all from me. Thank you for taking my questions.

Next question.

And our next ethics question is from line of Andy Stapp of Hilliard Lyons. Your line is open.

Good morning.

Morning.

What were new production yields during the quarter?

Seven.

Well, there were seven total deals. There were four primary proprietary and three syndicates. The deal specifically there was a software technology business. It's all listed on our Q page 26, a software technology business, a aerospace, defense supplier manufacturing business. There was a consulting business in efficient - efficiencies and production capabilities and there was the oil and gas chemicals distribution business that I referred to as the four primary proprietary investments.

Okay. All right. All the rest of my questions were answered.

All right.

Thank you, Andy.

Other questions.

We do have another question from the line of Phil Brown, a Private Investor. Your line is open.

Yeah. Question for you. Last year a lot of the targets that you were articulating, like maintaining return on equity over 10% and maintaining your yields that you’re done and getting to $400 million which you've done. I'm just wondering, I know you don't give specific projections, but in terms of the dividend, assuming we can maintain these things and we’ve gotten some movement on LIBOR, do you - how confident are you, you think that this could - this would be the year that we could raise the dividend?

Well, you're just right in the heart here, I'll let our President to answer that question now.

Yeah, I think the – thing that we've focused most on and where I get the most amount of confidence is in my comments and our press release, our net interest margin has been moving substantially over the last year. That means the amount of interest income over interest expenses we've generated is up 24% December ‘17 over December ‘16. That is what drives dividends. The combination of that and the fact that the earnings power has held up and our voluntary incentive free credits are almost zero today. If you add to that, what I alluded to in terms of the average assets that are outstanding and the continued movement to reduce our financing costs, all of those things are headed in the right direction. That continues, I suspect by the end of the year there will be significant discussions around doing something in that line. But you know, the earnings power is the driver here and I've said that before and I think we're in very good position to take up that - that baton as we get towards the tail end of our fiscal year.

Yea, that great. Thank you. I mean, it certainly seems that way, all the other goals have been met. So that sounds - that sounds terrific. Thank you.

Any other questions?

Yes. We do have another question. [Operator Instructions] In the line of David Miyazaki from Confluence Investment. Your line is open.

Hi, good morning. I guess just as a observation, I guess I'm not surprised to hear that Henry at one point was a hippie and you were learning double-digit Prime numbers in the past. But I do actually want to kind of go back to that, not all the way back to that double-digit Prime environment. But you know, David back in the 90s you were involved in lending. And my recollection is that you had a constructive relationship with the SBA and you know, in the last 20 years couple of decades it's really not been something that has been a strategic focus. So I was wondering if with the changing environment in Washington allegedly becoming a little more business friendly. Have you revisited that concept of going to the SBA?

Yeah, we talked about it a lot and I'm waiting to see what Congress does with regard to BDCs. They've talked about allowing BDCs to leverage more. My preference would be to leverage outside of the SBA. Most people like the SBA because it's quote cheap money. But once you add in all the expense of dealing with the SBA and the extra time and people, it's not that cheap. So my preference would be if the government is going to do it, this is Congress if they'll increase the amount of leverage that a BDC can have without having an SBIC. It would be very delightful.

So you’re - I mean, the number that's kind of floating around that there is moving one to one to two to one. How would that change the kinds of loans that you're doing and the amount of leverage you would hold on your balance sheet?

Most likely not change that kind of loans in the way we do transactions, but might change us a little bit in terms of just putting a few more leverage on the balance sheet. We run at about 220 to 1 is our sort of failsafe [ph] number. So if we could go up substantially from that and we could get long-term debt of preferred stock as a leverage, I feel a lot more comfortable because the loan portfolio has continued to get stronger and the stronger it gets the more you can tolerate leverage. But I never want to tolerate short term leverage against long-term debt that we make. So matching the book will still be something that we spent a lot of time on and it serves you well. So the goal is to see if Congress will do something for BDCs and if they do then we probably wouldn't spend any time talking to the SBA. That would be my preference.

In the portfolio just to – let me give you some additional color, today if we want to participate in a larger transaction and maybe larger, maybe $25 million to $40 million. The pricing on that is probably below where we typically can play. So the only way we can play in that deal today is we'll take a second lien interest if we like the fundamentals like the overall leverage and all the other credit metrics. So you've seen that play out through our portfolio where our second liens have grown over the course of last year and we've kind of hit an equilibrium of about 50% senior and 45% second. So if we had more leverage we probably would have more first lien assets and less second lien assets to avoid the situation I alluded to. Secondly, if the pricing compression were to continue, we're on the verge of think - you know, assessing off balance sheet partnerships or lending joint venture type arrangements to be able to take advantage of some of those opportunities that we cannot run on our balance sheet of 1 to 1 leverage. So both of those become less required or less urgent, if the Congress were to move the benchmark for us, obviously market conditions are continuing to evolve if the spread compression abates in light of some of the market conditions today, obviously that will also change those considerations. So it's a moving situation. But overall I think the leverage would give us a little bit more flexibility relative to our peers who are fairly heavily leaning on the SBA non-regulatory exclusion of that debt capital.

Yes. So if I understand it properly, then what you're saying is that with the higher leverage change - if Congress were to do that, then it would open up the door for you to have a more senior secured oriented focus, maybe with some larger companies and still maintain the same ROE?

Yes.

Okay. Okay.

Yeah, I think I would proportionally because of the amount of debt - because the - we really compared to our peers don't use that leverage as aggressively, I think it gives us a little bit more flexibility on the ROE equation.

Sure, sure. And what was – and roughly speaking that was up in just a ballpark, when you think about the EBITDA of the proprietary deals that you did this quarter roughly what was that level and is that pretty consistent with where you've been over the past few quarters?

It is fairly consistent, I mean, typically we won't touch anything under $3 million of EBITDA and very rarely will it probably go above 10 unless we are going with a more rifle shot approach to a sub second lien position. The second lien positions tend of have much higher EBITDA and we slide into a much larger transaction. This quarter I would say the range is somewhere between $3 million and $8 million. I will say when you look at our largest asset they tend to be much larger companies. We have some in the portfolio that are approaching mid 20s in EBITDA today. So - but we're still in the same sweet spot. Sub 10 is our primary focus.

Okay. And so I presume that the smaller amount of syndicated deals that you do would tend to have much larger average EBITDA like maybe in the mid to upper middle market kind of size?

Yeah, the syndicated deals I would say are somewhere between $50 million and $150 million of EBITDA. And we typically play in those situations where we wouldn't otherwise be able to participate in those industry - the diversified industries of those businesses represent. And so they are definitely up market. And I would say our participation in that realm has dwindled dramatically. We happened to see a number of situations in the last quarter that were a little unusual. But I think if you go back over our track record, our percentage of assets in that category had decreased dramatically. I think we had a low point before these we were probably in the $20 million to $25 million of the total investment and relative to our portfolio that was under 10%. There have been times in the past where that number been upwards of 20%. So that portfolio has been decreasing and as we've said in the past, we occasionally find opportunities as it gets towards the December quarter, it tends to be a stronger point for that kind of investment, and we took advantage of that last quarter.

Okay, great. That's some very helpful detail. I appreciate it.

Certainly.

All right. Next question.

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

Well, thank you all for calling in. It was a great quarter and we all look forward to talking to you again next quarter. That's the end of this conference call.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude the program. You may not disconnect. Everyone have a great day.