Gladstone Investment Corporation 5.00% Notes Due 2026 (GAINN) Q4 2012 Earnings Report, Transcript and Summary

Good morning and welcome to the Gladstone Investment Corporation Fourth Quarter and Year-Ended March 31, 2013 Shareholders Conference Call. [Operator Instructions] Please note that this event is being recorded. And now, I’d like to turn the conference over to David Gladstone. Mr. Gladstone, please go ahead.

Thank you, Keith and hello and good morning to all of you out there. This is David Gladstone, the Chairman and this is the quarterly earnings conference call for the shareholders and analysts of Gladstone Investment. The common stocks traded on the NASDAQ under the symbol GAIN, and the preferred stock is traded on the same index, but it’s under GAIN with a P, and we’ll cover the quarter and the yearend. And thank you all for calling in. We’re always happy to talk with our shareholders about the company and I wish we could do it more often, but this is when we have to do it, and it’s good time to do it as well. We hope you all to take the opportunity to visit our website, it’s www.gladstoneinvestment.com where you can sign up for email notices, and so you can receive information about the company in a timely fashion, and please remember that you have an open invitation that if you’re in the Washington, D.C. area, and you have a few minutes, drive on out to McLean, Virginia, where we have our offices, and please come in and say hello. You will see some of the finest people in the business and now I need to read the statement about forward-looking statements. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Security 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, and we believe those plans to be reasonable. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, and tends, will, should, may and similar expressions. There are many factors that may cause our actual results to be materially different from those future results that are expressed or implied in these forward-looking statements, including those factors listed in the caption Risk Factors, that were in our 10-K that we filed yesterday and our 10-Q filings that you will see at the Securities and Exchange Commissions’ website, as well as at GladstoneInvestment.com. Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise and after the date of this conference call. Please also note that past performance or market information is not a guarantee of future results. Well, as always we will begin first with Dave Dullum, he is President and Board member of the company, and he will cover a lot of ground. Dave, go ahead.

Thanks, David, good morning. As you know your company Gladstone Investment provides capital for businesses that are being purchased in support of our management team and other equity investors and these are usually companies with annual sales between $20 million to $100 million which is what we describe as the lower middle market. We provide subordinated debt and equity and occasionally we will actually make some senior debt investments. This combination produces a mix of assets for us, which is the basis of our strategy. Our debt investments provide income to grow the dividends while we expect the equity value to appreciate and therefore build shareholder value. I should say that this is a bit different from other public BDCs that are predominately debt focused. So it’s really important to keep in mind that the equity portion of our assets really do have meaning and are important to the overall value of our company. At March 31, 2013 on a cost basis our assets consisted of income producing debt investments of approximately $239 million or about 73% of the total portfolio and about $87 million or 27% of the total portfolio in equity securities, which we expect to produce capital gains. So there are a number of factors at any time that affect this ratio including loan payoffs, and if we have needed to convert a loan to equity or vice versa. In the most recent quarter, our total interest-bearing debt portfolio had a 12.4% cash yield, which is a little bit down from 12.7% for the prior quarter, but slightly up at 12.5% for the full fiscal year, which ended of course 3/31 this year, so interest-bearing debt is the primary source of cash to pay our dividends. Additionally, we have success fees, which is a component of our debt instruments or onto dealt these before, because success fees, they are contractually due upon the sale of our portfolio company, although the portfolio company could pay it early. We recognize these success fees as income though only when we receive the cash. And even though we did not receive any success fees in the most recent quarter, we have in the past and we certainly expect to do so in the future. As of March 31, 2013 approximately 76% of our interest-bearing debt has associated success fees with an average contractual rate of 3.1% per annum. Currently the success fees owing to us is approximately $12.9 million, which is about $0.49 per share. Now we do not accrue these success fees on the balance sheet, though we do report on them in the written part of our report to shareholders. They are important, but there is no guarantee that we will be able to collect all of the success fees or have any real control over the timing of the collection. So, while the equity securities we own are not producing current cash income on a regular basis, we do expect the equity to appreciate and add to shareholder value. For instance, since mid-2010 we have realized capital gains of around $30 million through the sale of stock ownership in various portfolio companies. Additionally, our preferred activity investments will periodically generate current income due to payment of dividends which we would obviously receive. For instance, we received a dividend of about $700,000 on the preferred shares of Acme Cryogenics in the December 31, 2012 quarter, and we recognized $4.1 million in dividend in the March 31, 2013 quarter from Galaxy Tools. So, as our portfolio builds we would expect to increase the interest in dividend income and the dividend payout to shareholders and also seek asset appreciation through growth in the equity value of the stocks we own. So, deal origination obviously is where it all starts, so how do we do this? Well, generally we obtain our investment opportunities that partnering with the management teams and other sponsors, and they buy out our company. Our combination of debt and equity is our product and we believe in the competitive advantage in the market that we serve. Therefore, the deal sources that we concentrate on are independent sponsors, middle market investment bankers, and middle market private equity firms. We have found that the independent sponsors are a key target for us as generally these are investment professionals that do not have a dedicated pool of capital that add their value to the deal sourcing and industry margin in a particular transaction. Therefore, our ability to provide a certainty to close and a majority of their required capital with our debt and equity investment is compelling to them. In addition, from time to time, we may find opportunities to provide capital in support of a business owner who is not seeking to sell the company outright, but does wish to sell a portion of the company while financing continued growth; in which case, we will invest in the debt and equity in exchange for significant ownership in that business. And we’ve reported on this before, but in July 2012 the SEC approved an exemptive order that allows us to co-invest with our affiliate Gladstone Capital Corporation. This provides origination opportunities to a broader range of companies and a flexibility to invest in slightly larger companies, while at the same time keeping our investment amount in a single portfolio company within our regulatory guidelines. We have not announced any core investments to date, although we believe this capability will lead traditional opportunities in the near future. Let us review some specific results on the fund, so for the quarter ended March 31, 2013 we did not make any new investments though for the fiscal year, we invested in 4 new buyouts for a total of roughly $69.8 million and subsequent to the fiscal year end we invested $17.7 million in a new transaction where we acquired a company called Jackrabbit, Inc. through a combination of debt and equity and in fact in conjunction with an independent sponsor. Jackrabbit is located in California and it’s a manufacture of harvesting equipment for almonds and other nut crops. For the March 31, 2013 quarter we invested $2.9 million in 5 of our existing portfolio companies and we received $4.1 million in repayments as previously mentioned. For the fiscal year ended 03/31/2013, we invested $15.5 million in our existing portfolio companies and received $23.2 million in repayments. Subsequent to the fiscal year end we received principal repayments of $1.3 million from some of our existing portfolio companies. So as a result of all of this, at the end of the fiscal year we had $326 million invested in portfolio companies at cost which actually is up from $266 million at the end of the fiscal year 2012. We were able to maintain our dividend to stockholders for the quarter ended March 31, 2013 of $0.05 per month per common share, and our board also declared a dividend of $0.05 per month per common shares through June of this year, where we really hope to continue to make favorable dividend payouts for the foreseeable future. Looking at the actual portfolio. In general, most of our portfolio companies are performing very well, and there are a few that continue to challenge us. This is why our investment teams work very diligently to limit the losses, increase the equity value, and preserve cash flow from our portfolio companies. Two of our portfolio companies, Galaxy Tools and CCE, increasing value over the fiscal year by $12.1 million and $7.5 million, respectively. CCE has been back on accrual status since last quarter, and in the quarter, we were able to convert a portion of the Galaxy equity back to debt due to improved performance in growth of that company. So these are very good examples of our philosophy, where we dedicate ourselves to our investments operationally and preserve shareholder capital versus really walking away from a portfolio company when and if the investment gets a bit difficult. We still have work to do with 2 portfolio companies that are on non-accrual. Though in general, we believe our overall portfolio is very well balanced. In terms of the marketplace today, we think the floor of opportunities for buyout continues to be very good in both quality and quantity, and in fact I’m seeing some increase in activity of reasonably good companies. Senior bank financing also is more readily available and reasonably price, which of course accommodates these leverage transactions. So as a result, as we work hard, we are finding opportunities where the valuations that would interest us for acquisition of these companies relative to the trailing EBITDA are in multiples of roughly 6 to 6.5 for these good companies. We certainly see higher valuations, but we try to avoid these as we are really not clear how one gets a good return on investment at higher values. In terms of the pipeline, therefore we continue to be very active with marketing and the deal generating activity. We stress our competitive advantage of being able to provide a subordinated debt and the equity to complete a transaction. I’m very proud of our investment team at Gladstone Investment who are focused on new deal generation and building the companies in the portfolio. And, I really expect these efforts to provide good results and growth going forward. So, in summary, our goal for this fund is to maximize our distribution with shareholders while achieving growth of both the equity values and income producing assets in the portfolio through the proprietary investments in the lower middle market company buyout arena. So, I will now turn it back over to David Gladstone.

All right, thank you, David Dullum, that was a great report, and I just want to say how excited I am about the future for this company. I think it has great upside potential. And now, let’s hear from our CFO and Treasurer David Watson on the fund’s financial performance for this quarter.

Great. Good morning everyone. It’s been a good quarter and fiscal year, and I hope you had a chance to review our 10-K annual report that we filed last night. I’m just going to get on a couple of highlights and I’m going to start with our recent capital activity. We were able to increase the net commitment amount on our line of credit from $60 million to $70 million with our existing lenders, and extend the maturity date approximately 6 months to April 30, 2016 or 3 years out. If it is not renewed or extended by that maturity date, all principal and interest will be due and payable on or before April 30, 2017 or 4 years out. In addition, there are 2 one-year extension options to be agreed upon by all parties which if exercised could effectively push the facility out 6 years and all the other terms generally remain the same. So, we are pretty excited about that. Also, as mentioned on the prior earnings call, we completed a public offering in the third quarter of approximately $4.4 million shares of our common stock at a public offering price of $7.50 per share which is below then current NAV per share. Growth proceeds totaled $33 million and net proceeds after deducting underwriting discounts and offering extensions formed by us were $31.1 million which renews 3 paid borrowings under our credit facility. These proceeds in part will allow us to grow the portfolio by making new investments, generate additional income through these new investments and provide us additional equity capital to help ensure continued compliance with regulatory test and allow us to increase our debt capital while still complying with our applicable debt-to-equity ratios. Between the proceeds from our common offering and the extension and expansion on our line of credit we feel we are well capitalized for 2014 fiscal year to continue making good investments for our shareholders. Turning over to our balance sheet, at the end of the March year we had $380 million in total assets, consisting of $287 million in investments at fair value, $86 million in cash and cash equivalents, and $7 million in other assets. Included in the cash and cash equivalents is $65 million of U.S. Treasury Securities purchased through the use of borrowed funds at quarter-end to satisfy our asset diversification requirements. We had $139 million in liabilities consisting of $40 million in term preferred stock, $31 million in borrowings outstanding on our 3-year credit facility, $5 million in secured borrowings and $58 million borrowed via the short-term loan, and then remaining $12 million in other assets, in other liabilities, excuse me. In all as of March 31, 2013 we had $241 million in net assets or $9.10 per share which is up 45% per share from our December 31, 2012 quarter-end. One of the advantages of the common offering was that it helped reduced our leverage. However, since the offering was below NAV, there were some dilutions to our NAV per share, which resulted in a reduction of approximately $0.31 per share last quarter. Currently, we had investments at fair value of $302 million, cash of $14 million and $30.5 million in borrowings on our credit facility, and $5 million in secured borrowings. In other words, for every investment dollar at fair value, we have less than $0.06 of debt leverage on it, and if you include our Term Preferred Stock as leverage, we have less than $0.19 of leverage per every investment dollar fair value. So we really believe that this is a safe balance sheet for a company like ours and we believe our overall risk profile is low. Moving over to the income statements. For the March quarter end, total investment income was $10.5 million versus $7.2 million in the prior quarter ended December 31, 2012. While total expenses including credits were $4.7 million versus $3.2 million in the prior quarter leaving net investment income of $5.8 million, which is $4 million from the prior quarter, an increase of 48%. This increase was primarily due to an increase in other income of $4.1 million and dividend income from the Galaxy recapitalization, partially offset from the resulting increase in incentive fee expense and lower credits to the base management fee, because there were no new deals in the quarter when compared to the prior quarter. I think it’s important to take a moment to touch on the significant steady growth that we’ve had in our portfolio in income over the past 2 years. Our year-over-year growth rate over the past 2 years and the size of our weighted average interest-bearing assets has been 27%. The growth rate over the past 2 years and the amount of cash interest income recorded has been 29%. In addition, our weighted average yield on interest-bearing debt investment has increased to 12.4% in the current quarter, up from 11.5% 2 years ago. We believe that positive growth in debt investments alone has positioned this company well for the future. This growth has positively impacted our bottom-line from the year-over-year standpoint. Interest income revenue is up 26.6% and other income while unpredictable in nature is up 247%, which is generally attributed to our equity investments. In fact, I want to take a moment and point out that we have recognized in aggregate $17.7 million in other income over the last 3 years, which we are pleased with, but can’t forecast and this is unpredictable income for the future. The overall revenue increased by 43.8% year-over-year which is partially offset by increased dividend in interest expense cost associated with carrying a larger portfolio and increased advisor cost from the base management fee and incentive fee. In total, our net investment income increased 20% over the prior fiscal year. Let’s turn to realized and unrealized changes in our assets. Realized gains and losses come from actual sales or disposals of investments. Unrealized appreciation and depreciation come from our requirement to mark our investments to fair value on our balance sheet with a change of fair value from one page to the next recognized in our income statement. Unrealized appreciation and depreciation is a non-cash event. Regarding our realized activity turning to 3 months ended March 31, 2013 and December 31, 2012 we recorded minimal realized activity. As for our unrealized activity, the net unrealized appreciation over our entire portfolio for the quarter ended March 31, 2013 was approximately $10.4 million. This unrealized appreciation was primarily from Venyu Solutions Inc. which benefited from increased financial and operational performance and market comparable and Galaxy Tool Holdings which continues to increase its financial and operational performance. This gains as well as those of certain others were partially offset by limited unrealized depreciation in a number of our portfolio companies, which is primarily due to decrease in market comparables and to a lesser extent decrease performance debt certain of our portfolio companies. Our entire portfolio has had its fair value as the percentage of cost increase over the year. For the March year end our entire portfolio was fair valued at 87.8% of cost up from 84.5% of cost as of December 31, 2012 and up from last March where it was 84.7%. Now, let’s turn to net increase and net assets from operations. This term is a combination of net investment income, unrealized net appreciation or depreciation and realized gains and losses. The March 2013 quarter end, this number was an increase of $15.9 million or $0.66 per share, versus an increase of $4.7 million or $0.18 per share in the December quarter. The quarter-over-quarter change is primarily due to net unrealized appreciation in the current quarter. While we believe our overall investment portfolio is stable and continues to meet expectation, date-to markets move fast and are generally volatile. Investor should expect continued volatility in the aggregate value of our portfolio. All of our portfolio companies are current and payment expect for 2, ASH and Tread which they both continue to remain on non-accrual. Regarding interest rate risk, approximately 80% of our loans as in prior quarters have variable rates, but they all have a minimum or floor in the rate charge. And with the low interest rates that we have experienced over the last several years, these floors have minimized the negative impact on our ability to make distributions. Weighted average floor on our variable rate loans is 2.7% with an average margin of 9.6% resulting in an all-in average rate of 12.3%. The remaining 20% of our loans are fixed with an average rate of 12.6%. With that, we look forward to maintaining momentum and help to continue to increase our income generating assets to increase our re-occurring income and to increase our distributions to our stockholders and now I will turn the call back over to David.

All right, thanks so much David Watson. That’s was a good report. I hope each of our listeners will read our press release, and also pen a copy of the annual report called 10-K, Form 10-K that’s been filed with the SEC and can be accessed on our website at www.GladstoneInvestment.com. And it’s also on the SEC website. With our year ending March 31, the major news, of course, is that activity investing in new portfolio companies that seems to be moving along, and we think that fiscal year for 2014 will be a very good year to invest in this company as well. We have been active in the capital marketplace as mentioned. In March, we raised $40 million of term preferred, that’s March 2012, and then $31 million of an offering in October. So the marketplaces are receptive to raising new capital should we need to do so. In addition, we have a favorable line of credit and expanded to $70 million, extended through to April 2016, so we have a room to borrow under that line as well, and we are looking for new investment opportunities and I just think this is a fabulous fund at this point in time with great opportunity for the future. As always, we manage the business and have some things external to our day-to-day operation that we worry a lot of about. The economy is not growing very fast. It is growing, thank goodness. It is a difficult time to invest because there are so many external things out there in the mix that we have to consider, and I know you all here this each time, but we ask these questions about all the things that we talk about, when we’re looking at a deal. And I’ll just mention a few of them: oil prices of course, if they should spike that would have a difficult impact. Oil prices are just too high and supplies too dependent on countries that -- well they don’t wish us well. High gas prices for cars and trucks will hurt every business in the United States including some in our portfolio company as well. We are continuing to worry about inflation, the decision by the Congress and the President of the United States to expand the money supply and keep printing money. Ultimately that will cause much more inflation than we have today. It’s just a bad idea to borrow and spend away, and think that we’ve going to spend and borrow our way into prosperity. That socialistic theory has been disproven here in the United States, and it’s hundreds of times in other countries. The spending by the federal government is still out of control. The government can’t continue to print money the way they are. We’re now borrowing more than 43% of every dollar that we spend, and the remainder of 2013 I think it may get as high as 50%. There is recent article showing that the amount of money being spent is not nearly that high, but that’s just because the collections in April were so strong. Now we’ll go back to borrowing again. The amount of money being spent on the war in Afghanistan still hurts the economy, and we’ve been told it’s going to stop in 2014. I certainly hope that’s true; we’d like to see all of our troops come home. And the terrible news is that parts of the government want to raise taxes, all kinds of taxes. The middle class pays the bulk of the taxes and they will be hit with any tax raises, and I just hope Congress will get over this idea of raising taxes to solve problems; they really need to cut the amount of spending. Trade deficit with China, still terrible, there are other nations that same thing’s going on. China and others disadvantage us by subsidizing their industries and this means our companies can’t compete with them. That’s why so many jobs go overseas is because they are being subsidized by their local governments. There just has to be somebody in this government that will stop China from continuing to cheat. The stagnation in the housing industry may be coming to an end and that’s a good thing, unless the lenders again, of course, begin making loans to those who can’t make mortgage payments, then we’ll go back in the soup again. At this point, a lot of the increase in the house buying is from funds that have been set up. There are any number of funds now both private and public that are out there buying up these houses and renting them out, I’m not sure how this will work out in the end, but it is good to see that the houses are taken off the marketplace and see some strength in the market now. I know you have all read about the economic problems in the Eurozone and now we hear that Germany may be having some of the same problems that we thought they were exempt from. The good news is most of our companies don’t sell a lot into the European marketplace, so we are in good shape there. The big bugaboo that’s going on today is unemployment in the U.S. is just far too high. The numbers used by the government and reported in the popular press don’t include all of those folks who are working part-time who would like to be full-time, nor does it include those who have stopped looking for work altogether. A more realistic number and if you were using the number that many years ago they used, the unemployment rate’s probably 14%, 15% and way too high. In spite of all these negatives and these are things we worry about every time we do a deal, make an investment, the small business base in the United States today is still not a disaster. The real problem today is the number of new small businesses that are starting up is the lowest in 20 years. We just don’t have entrepreneurs willing to jump up and start a new business. And, this lingering recession is just having an impact on our portfolio of companies and like most of the companies in the United States, our portfolio of companies we’ve got some that have seen tremendous increases in revenue and backlog, others are not seeing very good increases, and a few others are just not doing well at all. So, we’ve got a very uneven economy and it shows up in our portfolio as well. The distributions declared by our board, of course, were $0.05 per month for the months of April, May and June 2013 at $0.60 a year run-rate and the next meeting is early July, we’ll consider the dividend for July, August and September 2013. Current distribution rate of common stock with the common stock about $7.27 I think that was a close yesterday. That’s about 8.2% yield, so great yield for a company as strong as this one. Our monthly distribution on the preferred stock is $1.78 annually and stock has been trading above $25 a share. So, you might want to look at GAINP and that’s the preferred stock. So, please go to our website, sign up for email notification, we don’t send out junk mail, just news about your company and that’s at www.GladstoneInvestment.com and you can follow us on Twitter under GladstoneComps, and also find us on Facebook under the Gladstone Company. Folks, as far as we can see, the next 6 months, it looks okay, we can’t see much further than that, but the economy is not strong, and we are looking for new investments now. I hope to have some really good news for you in the future. And, at this point, I’ll just stop and turn it over to our operator and we’ll get some questions from our analyst and some of our loyal shareholders. So, come on board.

[Operator Instructions] And the first question comes from Mickey Schleien with Ladenburg.

David, I just want to go back to the Galaxy transaction and make sure I understand it. I think in your comments you said that the company’s performance has improved and that allows you to or that allows them to be able to service debt as oppose to preferred share. So could you give me a sense of what the yield was on the preferred and presumably that was higher than the coupon on the debt, which is 13.5%.

Mickey, this is David Gladstone, and unfortunately you have 3 Davids on the phone. So I’m going to turn this one over to David Dullum, the president, to answer.

Okay.

Yes. Sure Mickey and I will not pass it on, but have David Watson embellish a little bit here. Actually what we had done previously was restructure because when we did the investment, we had some subsequent problems really due to the economy and so on. We brought in new management, the company’s improved and it’s really a great company and a wonderful space currently, and as a result of that and the strength and EBITDA of the business, what we’re able to do is take that preferred, and which was we had to convert and bring it back to the subordinated debt position, which you saw the original sort of investment. So actually the return on the subordinate will be higher than it was on the preferred. So that’s really the mechanic we went through and what we did and I’ll ask David to put some more color on the actual numbers if you don’t mind or the actual transaction. David Watson?

Sure, sure. Mickey, in 2010 we had converted $12.3 million in debt to a preferred equity to give the company a little breathing room, and as Dave Dullum mentioned to be able to turn the ship and they’ve done that tremendously. So, we are really to taking the opportunity to revert back to the old revert to the capital structure that it originally was, and I think it’s advantageous for many reasons. It will increase our current cash interest going forward quarterly by $425,000 which we can -- which will be on a consistent basis and consider in our distribution rate. And ultimately, we are going to collect upon repayment of the debt security the dividend income that we recognized through this transaction. So, I think it’s a good win on a number of levels and it’s really getting back to the original investment stages.

Mickey, you have another question?

Yes, I do. If the company is performing better then why are the preferred shares still marked at 50% more or less?

Dave Dullum, you want to take that?

Yes, right, it’s in function when we value our companies, and we sort of alluded to this. We have to look at the way we do our valuation based on multiples in a trailing 12-months’ number. So, we start out with that multiple times and adjustment due to an index factor times the EBITDA, and sometimes when you do the waterfall as it comes down through to the debt layers and so on to the actual equity tranches, some cases preferred, in other cases common stock, it might cause that anomaly if you will at that point in time. And, I believe that’s what the case is here, and then more important thing, however, indeed, is that we’ve been able to take what was a preferred that we had put in a preferred, David Watson said to help the business brought it back to a current paying status as you pointed out at a very attractive rate of interest.

Okay, I understand and my last question is in relation to your cash position. I think this may have been asked in past conference calls, but you are holding about $28 million of cash and about net of the proceeds from your short-term loans, which I understand you need for the diversification test, but you also have about $32 million on the credit facility. I don’t understand why wouldn’t you pay-off the credit facility or pay down the credit facility and hold a lot less cash.

David Watson, you want to take that one.

Sure, Mickey at any given time, we might be carrying a little extra cash in anticipation of closing on a new investment and subsequent to year end. We in April closed on the before mentioned Jackrabbit investment, which was about $17.7 million or so. So and then right now we are holding $15 million of cash and so as we -- our team -- a much more favorable investing environment and our pipeline is solid and Dave Dullum can definitely speak to that. We will continue to put investments on the books and our cash is going to -- also relative to that.

Okay, you said cash is now $15 million, 1-5?

Currently it’s $15 million.

Next question comes from Daniel Furtado with Jefferies.

I just had a couple higher level questions. But first, David, just so -- or David Gladstone, I should say -- just so I understand correctly from a business environment, what you see, boots on the ground out there looks to be pretty consistent so far year-to-date compared to the prior quarter. I mean, I get the sense you are not seeing a material improvement or degradation of the business environment for the companies in your portfolio.

I think if you look at our portfolio today and even if you spread it to Gladstone capital which is similar in some respects, you’re seeing what I think the economy is seeing and there is some good, some bad and some ugly. We’ve got some good companies out there. We’ve got some bad, and we’ve got a couple of uglies in this company that need serious work to get turned around. And I think they’ll both be turned around. One of them is coming along pretty well. So I don’t think there is any -- we’re not falling off a ledge the way we did in 2009. The problem has been all along is the slowness of this recovery. Granted, everybody’s answer to that is it was a tremendously bad recession. I can buy some of that, but this recession recovery has been the worst that I’ve ever lived through, and I remember 4 of them now and quite frankly I think a lot of what was done is missteps of U.S. government. But at the end of the day, it is what it is, and we’ll live through it, and I think over time this economy can heal itself unless the government continues to make some mistake. So we’ll just have to see, Dan, right now. I’d say everything is status quo, it’s not moving one way or the other, sort of inching along.

Excellent. And then, from a competition standpoint, I know over the last quarters, one of them kind of the topics that have risen to investors’ mindset -- in the front of their mind is, especially on the bank side it’s just increased competition there. You mentioned earlier in the call that more bank engagement is obviously good for your business as they come in on the senior part, but is that competition, I mean how has that changed? Are you seeing more of it or is it just being pretty consistent? And then follow-up to that would be, if there is more competition, are you starting to get pressure from your portfolio companies from the standpoint of yields on their paper versus what’s in the market today as it feels like everything that’s fixed income has continued to tighten, or rates have continued to move lower. Is that some type of pressure that you are feeling percolating up from the portfolio or how should we think about competition and then how that related to rates in the book?

Well, think about it in 2 ways. First of all the banks; the banks have gotten a little bit better. There has not been any wholesale change and that has to do with the regulatory environment. Banks are not being encouraged, at least by the people who investigate the banks and review their loans, to make subordinated debt or second lien debt. They are still in the first lien position mostly and revolvers, and little bit of term coming in which we applaud, because that means we don’t have to provide it, and they can provide it at fairly low rates. And so, I see the banks still not being aggressive like they were in 2005 and 2006 where they were doing airball kind of deals with no collateral. The government is still very tight on the banks, so I don’t think you are going to see the banks coming into our marketplace, but I do enjoy seeing them come back and make a few term loans here, small amount, they are not going in deep in terms of rounds as we call them and we call them levels of EBITDA. If EBITDA happens to be 100, you might see them do one round of EBITDA. So, I think they will get into that position, again backed up by collateral. So, the banks are there; they are doing a reasonably good job, but they are not aggressive at all in terms of our marketplace. Then the second side of it, to your question is what’s driving rates down if the banks aren’t. And, that happens to be there is just not that many opportunities in terms of sort of nationwide of people looking for loans and so as a result there has been crowding towards the marketplace now. We sort of sidestepped that in this fund by avoiding the auction area where people go in and talk to say an LBO fund, and we do that in Gladstone Capital about doing their subordinated debts. Here David Dullum and his team go out and actually interact with people who are buying businesses and so these are not funds, these are people who have tied up a deal and want to get financing for it. And, we have a very good idea of how to do those because we have done them so long, and that is if you look at the right-hand side of a balance sheet the bank will come in and do some revolver and if they don’t we will do it. We have done some of that. The bank may do a sliver of senior debt and if not we do that, and then we do the subordinated or second lien debt and then we’ll provide some preferred and common and order them to make sure that this deal closes. And, in some cases, we just do the whole right-hand side of the balance sheet and after the closing we refinance as much as we can with the bank at a lower rate. As far as pressure from our existing portfolio to say, “please drop your rates, you are not competitive,” we haven’t seen a lot of that. Obviously, as the companies get stronger they want lower rates and we haven’t had to do that. And, I think we did it in one case in this company, but it’s not a lot. Obviously, as people get cheaper money, if there is such a thing it could drive rates lower. We just don’t see them going below where they are right now. Hope that answers your question.

Next question comes from David West from Davenport & Company.

I know your 2 non-accruals you carry at 0 fair market value, but I wonder if you could give us a quick update on both ASH and TREAD.

Why don’t you do that, Dave Dullum? I know these are private companies and we hate to talk about them, because they are private, but we’ll give you as much as Dave Dullum feels he can give.

Sure. Thanks, David Watson –- excuse me, Gladstone and David West. As we mentioned in I think the last couple of quarters, we’ve been relatively consistent in both companies. We have done the things we’ve needed to do in terms of bringing on professional appropriate quality management teams, and we’re starting to see results frankly in both cases, and I’ve really cannot give you any greater detail per se other than just to say we have a lot of good resources on the case. TREAD is beginning to stabilize. Of course, we’re in economy and mining in general had some impact on it. However, we are looking at areas and ways in we can diversify its manufacturing base so to speak. But right now they are both performing well, both actually generating positive cash flow. So we keep working it and doing what we do best.

All right.

Dave West, just to piggyback on that. I think these both are in categories, well, today the same way we were in a couple of other companies, CCE for example. And both of these cases, we brought in new management and the new management has started to focus on taking the companies in little bit different area, they have lots of expertise in these companies and I think you will see over the next year pretty good progress in both of those.

[Operator Instructions] All right, Mr. Gladstone, there is nothing else at the present time. Do you have any closing comments?

Just to say thanks again for calling in, and thanks to listening to the story and I think we’ll have some great news for you as we do the next quarter. That’s the end of this conference call. Thank you all.

Thank you.

Thank you.

The conference has concluded. Thank you for attending today’s presentation. You may now disconnect.