Ladies and gentlemen, welcome to today's Gladstone Capital Shareholders Call for the quarter ending March 31, 2020. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. David Gladstone. Please go ahead, sir.

Well, thank you Marcia [ph] for that nice introduction. And this is again, David Gladstone, I'm Chairman for the quarterly earnings call for Gladstone Capital for the quarter ending March 31, 2020. Thank you all for calling in. We're always happy to talk to our shareholders and any of the analysts who get on and ask us good questions. And welcome -- we welcome the opportunity to provide updates on our company and the investment portfolio that we have. Now, we'll start off with our General Counsel as we always do. Michael LiCalsi, he'll make some statements regarding certain forward-looking statements. Michael?

Thanks, David and good morning, everybody. Today's report may include forward-looking statements under the Securities Act of 1933 and Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans which we believe to be reasonable. Now, 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 in our forms 10-Q, 10-K and other documents that we filed with the SEC. You can find these on the Investor Relations page of our website which is www.gladstonecapital.com. You can also sign up for email notification service, and you can also find these documents on the SEC's website, which is 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 as required by law. Today's call is an overview of our results, so we ask that you review our press release and Form 10-Q issued yesterday for more detailed information. Again, you can find them on the Investor Relations page of our website. And with that, I'll turn the call over to Gladstone Capital's President, Bob Marcotte. Bob?

Good morning. Thank you, Michael. Thank you all for dialing in this morning and given we got lots of cover, let's get into the summary of the results for Gladstone Capital for the quarter ended March 31, 2020. Originations for the quarter totaled $29.8 million, including a new proprietary second lien investment and add-on investments to support acquisitions or growth CapEx, and these funding did not include any COVID-19 related line draws. Repayments and proceeds on the quarter totaled $26.4 million, included -- and included the exit of our acquisition of the Mochi Ice Cream Company, which resulted in a realized gain of $2.5 million in Meridian, a non-earning asset which had previously been written-off. Interest income on the quarter declined $500,000 or 4% to $11 million, compared to the prior quarter with a drop in LIBOR and the movement of one credit to non-earning status. Prepayments and dividend income also declined, so total investment income for the quarter was down $700,000 to $11.5 million. Borrowing and administrative costs were largely unchanged on the quarter. However, net management fees declined by $900,000 to $1.1 million with the increase in the incentive fee credit resulting in net investment income of $6.5 million or $0.21 per share on the quarter. Net asset from operations declined by $27.8 million or $0.89 per share, which included $31.4 million of net unrealized portfolio depreciation on the quarter, largely as a result of COVID-19 market disruptions which I'll discuss in a moment. It also included a $3.1 million net realized loss from the exit of Mochi and Meridian. For the period, NAV declined $1.09 per share or 13.5% to $6.99 per share as of March 31, 2020. With respect to the portfolio, we were fortunate that our portfolio diversity and focus on industries which are generally…

Thanks, Bob. Good morning, everyone. During the March quarter, total interest income declined $500,000 or 4% to $11 million, primarily due to lower average LIBOR rates and the effect of higher non-earning assets. The investment portfolio average balance increased slightly to $404.3 million for the quarter compared to $401.4 million for the quarter ended December 31, 2019. The higher investment balance was more than offset by the 40 basis point decline in the weighted average yield on our interest bearing portfolio, which declined to 10.9% from 11.3% in the previous quarter, largely with the 24 basis point decline in the average LIBOR rate. Other income decreased by $200,000 compared to last quarter with lower pre-payment fees and dividend income, resulting in total investment income for the quarter declining $700,000 or 5.5% to $11.5 million. Total expenses decreased by 13.9% quarter-over-quarter, primarily due to an $800,000 increase in the incentive fee credit granted by the Adviser. Net investment income for the quarter ended March 31, was $6.5 million, an increase of 2% as compared to the prior quarter or $0.21 per share and covered 100% of shareholder distribution. The net decrease in net assets resulting from operations of $27.8 million or $0.89 per share for the quarter ended March 31, compared to an increase of $700,000 or $0.02 per share for the quarter ended December 31. The current quarter decrease is driven by $31.4 million of net portfolio depreciation as covered by Bob earlier. Moving over to the balance sheet, as of March 31, total assets were $406 million consisting mainly of $398 million of investments at fair value and $8 million in cash and other assets. Liabilities were unchanged at $188 million as of March 31, and consisted of $92 million in borrowings on our credit facility, $57.5 million of…

Thank you, Bob, Michael, Nicole. You all did a great job in informing our stockholders and analysts that follow our company. Gladstone Capital had a good quarter and ended, in a very unknown environment that we're in today, much like all the other lenders in the middle market that are financing business like we finance. And I personally am really bullish on what's going to happen going forward, even though we don't know what the governments are going to do with regard to permitting the opening of businesses and we don't know the reaction of the customers either. Anyway, these companies are continuing to cruise along and have some good things that have been happening. They originated a $30 million new investment, which more than offset all the prepayments that the company has received. And the company did trigger a nice gain of $2.5 million on Mochi Ice Cream company that we had loaned money to, and the team is really busy monitoring the loans that we have to middle market companies. The damage from closing so many businesses that the government decided to do -- we'll not know clear what's going to happen until those businesses open again, we can't [ph] see what's going to happen. I personally am very optimistic about what's going to happen and I think that things will go back and be strong much sooner than I think most people are thinking it's going to happen. So in summary, the company continues to invest in mid-sized private businesses, always with good management teams, many of these situations are supported by private equity funds much like our size, they're mid-sized. And they are looking for experienced partners to support the acquisition and the growth of the business that they're investing in. This gives us an opportunity to make attractive investments in interest paying loans and those loans, of course, support the ongoing commitment to pay cash distributions to shareholders. I'm going to stop now and ask the operator to tell the callers how they can ask some questions of the team.

[Operator Instructions] Your first question comes from the line of Mickey Schleien.

Yes, good morning, everyone. Hope everyone there is doing well. My first question is for David actually. David, at the new dividend level and new hurdle rate, it still appears to me that the external manager may need to subsidize the incentive fee of Gladstone Capital on a net basis to cover the dividend. I definitely think it's commendable for Gladstone as a platform to prioritize shareholders' interests. But I'd like to understand how you and the management and the Board are thinking about this dynamic over the medium term, given the potential for higher non-accruals, and frankly the cost to originate and managing just run the portfolio along with the uncertainty over the length of the pandemic's impact.

Sure, Mickey. As you know, I'm a large shareholder and so I like my dividends, so I'm going to push as hard as I can to keep the dividends. We had a long discussion about the dividend payouts and we don't have a good answer yet because, quite frankly, we don't know how many companies are going to be around and what's going to happen over the next six months to a year. So much is up in the air, it's very difficult to do a good forecast. We did set things so that we think we can make all of the payments that we are trying to make. And I feel really good about being able to make the dividends that we've set at that. There are no guarantees in life, but that's where we are today. Bob, why don't you tune up on that one as well?

Mickey, obviously we -- when we made the announcement, we didn't have full scope and obviously it's still evolving in terms of what the ultimate implications are going to be on the businesses. When we looked at the dividend adjustment, we saw the LIBOR careening down and it subsequently dropped even more. And we basically absorbed much of the drop between where LIBOR was and the floor protections in our underlying portfolio. That was really the cause for the dividend adjustment. At this point, the floors in the portfolio are really supporting where the distribution is. So your question is, ultimately, the degradation or non-heightened non-performing and the impact on the business. At this point, we only have one investment in our non-accrual with an opportunity to, in the not-too-distant future potentially, correct that situation. We're not seeing a huge amount of pressure. It certainly could happen, given the slow recovery of some of these businesses. But I also wanted to emphasize a little different than maybe some of the other middle market businesses, the majority of our companies had either liquidity or relatively strong cash flow and the majority were able to qualify for PPP loan protections. So there was definitely liquidity that was created in those situations, which will help support the businesses. Two or three months from now, if they run out of that support, it may be a different situation, but we didn't feel that the time is appropriate to foreshadow what that might look like. So we adjusted based on what we knew. Under our current framework, we feel we can support this, but it's really a moving target and it may require some measure of support, as we've described, that we feel comfortable with where the dividend is in the portfolio it's currently performing.

Mickey, did you need additional information? You have other questions?

I have several other questions, if that's okay.

Ask on.

I noticed that the mark fair value to cost on second liens was 91.5%, but on first liens it was only 86.6%. My sense is that just may have to do with technical adjustments, but I was a little surprised by that. So any granularity you can or color you can provide there would be helpful.

I'm not exactly sure of the numbers you're referring to. If they were based under my comments, the second lien marks were fairly heavy, particularly in the syndicated realm, where they were down about 18%. As it relates to the proprietary, I think you're also then dealing with two factors. One is the underlying portfolio position but more notably how impacted the businesses were, based upon the perception of the COVID results. To give you an example, if a childcare facility loan -- if there were certain of them shut down, there was uncertainty as to the collection of those revenues, there was obviously a much more significant impact on the valuation of that asset. And so it's very much dictated by the degree to which the businesses were impacted and it's particular to the underlying portfolio. So I think we could talk more specifically about certain elements of your question, but I don't think we can look at it as a broad base, we look -- we marked the senior more than the junior.

Bob, what percentage of the portfolio would you consider to be syndicated or lightly syndicated?

Syndicated portfolio was roughly $30 million so it's a little under 8% or 9%, something like that.

Okay. And I noticed that the weighted average risk rating on the proprietary deals declined only slightly from 6.7% to 6.3%. How did that grading account for COVID risk? In other words, was there any sort of forward-looking assessment in that grading or is it really more in arrears?

As far as the financial results, it's more in arrears, but we did, on top of that, make somewhat of a COVID-type assessment and that's something that will be ongoing. There is potential that, that risk grading will go down a little bit next quarter, but it's something we continue to assess. And one of the major factors is our portfolio company's ability to pay and where that position was as of 3/31.

Well, and that's actually my next question. Besides B&T, did all borrowers make their payments during the quarter -- interest payments during the quarter?

Yes, they did.

Okay. And a couple of more questions, if I may. Bob, you referenced LIBOR floors, but I don't think you actually show them in your schedule of investments. Can you at least give us the average LIBOR floor in the portfolio so that we can get a sense of where things might look?

It's roughly 1%.

Okay. So we're definitely below that.

Yes, we're definitely below every one of the floors that's now in place, so between floors and a few fixed rate assets, we blew through that last month.

And that's a mixture of one month and three months reference -- LIBOR references?

It's almost all one month of LIBOR.

One month.

Some of the syndicated portfolios are three-months LIBOR, but the majority of our portfolio is one month. Yes.

Okay. And my last question, I do appreciate your patience, but there is so much going on, just in terms of risk assessment, could you give us a sense of the portfolio's average EBITDA amongst the borrowers and the average debt to EBITDA of the portfolio?

The average EBITDA, I would put in the $5 million to $8 million range. But you know, Mickey, we have credits that are probably 3 and 30. The deal we just closed had 67 in EBITDA. So I'm not sure the average gets you a lot, given the variability. The way the portfolio tends to roll out the vast majority of our senior secured assets are probably $5 million to $8 million of EBITDA. The vast majority of our second lien assets are probably $10 million to $15 million of EBITDA, because they're larger companies who are taking slightly a riskier positions in their larger businesses. In terms of overall leverage, I -- again averages are somewhat not indicative given what I've described. If you exclude the syndicated credits, the average leverage is -- the average EBITDA leverage is probably in the low 4 turns at the moment, but that could be anywhere between 2 turns and 6 turns. So you definitely have some outliers. The average is just probably north of 4.

That's really helpful. And I appreciate that and those were all my questions. Thank you.

Thank you for calling in, Mickey.

Okay. Do we have some other questions?

[Operator Instructions]

Any other questions?

Not at this time, sir.

All right. Well, that was a short one. And we thank all of you who called in and listened and if we have other ways of communicating, we'll definitely do press releases on things that are happening. So that's the end of this call and thank you all for calling in.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.